28 September 2023

The Lifecycle of a Business - Staging a Coup – removing a director from office

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune.

But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

Moving on to Directors: Lights, Camera, Action!

Staging a Coup – removing a director from office

Every company is run by its directors, but what can the members do if they are unhappy with how the directors are performing – can they kick a director out and replace them? It is a fundamental principle of company law that ultimately the members decide who is appointed to run their company, but how does this work in practice?

If members are dissatisfied with a director and the director will not resign, the first place the members should look is the company’s articles of association.

Companies have a great deal of scope to determine how directors are appointed and removed, and every set of articles will set out how this is done. The articles will usually provide that directors leave office automatically in certain circumstances, for example if they are bankrupt, physically or mentally incapable of fulfilling their duties, or if they fail to attend board meetings. Bespoke articles may contain provision for them to be removed by notice from a certain majority of members, by ordinary resolution, or by the rest of the board. The model articles, and their predecessor Table A, do not contain such provisions, so if the director’s office is not automatically terminated and the articles can’t be amended, how can they be removed?

Where there is no convenient method provided for in the articles, statute provides a long-established fallback option. This is currently found in section 168 Companies Act 2006, and enables the company to remove a director by ordinary resolution at a meeting. This power cannot be excluded or fettered by anything in the company’s articles (although there are some ways to avoid it, as mentioned below). Because removing a director in this manner is the ‘nuclear option’, and the interests of both the director and the members are engaged, there are a number of requirements that must be followed for the removal to be effective.

Firstly, unlike almost all other company resolutions, the resolution must be passed at a general meeting of the company – a written resolution will not be sufficient.

Secondly, special notice of the intention to move the resolution must be given at least 28 days before the meeting at which it is moved, and the company must give its members notice of the resolution either at the same time the meeting is called, or where that is not practicable, at least 14 days before the meeting.

The notice of the intention to move the resolution must also be sent to the director in question when received by the company, and they have the right to protest against their removal. This includes the right to be heard at the meeting, and to make written representations (of reasonable length) to be circulated to the members. This is to ensure that directors get the opportunity to make their case to the members – who, of course, may be swayed by their oratory and decide to keep them in office.

Only an ordinary resolution is required and so a bare majority of the votes at the meeting is sufficient to pass it and remove the director from office. It is wise for members seeking to remove a director to ensure that they will have sufficient support in attendance (in person or by proxy) at the meeting to carry the resolution – if that can be shown, the director may see the writing on the wall and agree to resign without the indignity of being removed.

While the provisions of section 168 cannot be excluded by the articles, there are scenarios where there will be no purpose to going through the process. The director may be directly appointed by members with a particular right to do so under the articles, and if they are removed could immediately be reappointed. The articles may also contain weighted voting rights for certain members, which could validly be exercised to prevent removal.

Members should also note when considering whether to remove a director that this will not affect any other rights that the director has – for example, they may have a claim for a breach of their employment contract. If the director is also a member of the company, they may also have a claim for unfair prejudice after being removed, or a contractual claim for breach of any shareholders’ agreement if, for example, the others have agreed to vote against a certain director’s removal and fail to do so.

It is also worth noting that the resolution must be put to the members in order to be passed, and a director may be reluctant to assist in calling the general meeting that might result in their defenestration. Members should take note of their powers under the Companies Act 2006 to compel the directors to call a general meeting, and to call it themselves if the board fails to do so –this is a further method of letting a director know they are doomed to be removed – and facilitate an orderly departure.

Finally, members should be wary of what will happen to relationships in the company after a director has been removed at a possibly ill-tempered meeting, especially in smaller companies where there are clear factions in the membership and an uncertain majority. Once disgruntled members realise they can remove directors, they can acquire a taste for it!

Disclaimer

This note reflects the law as at 28 September 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

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