Process for Removing a Director: A Step-by-Step Guide for Companies
Some companies might find themselves in the position of having to remove a director for several reasons, such as incompetence, or breach of their duties. If a company finds themselves in this unfortunate situation, there are a few options available.
HOW CAN A DIRECTOR BE REMOVED?
Resignation: the director himself may leave the office voluntarily. If he is under an employment contract, he must ensure that any notice procedures are followed in order to avoid any breach of contract.
Removal by the board of directors: depending on how the Articles of Association are written, the other directors could remove a director , though this must be in good faith.
Removal by the shareholders under the Companies Act 2006: if the shareholders are seeking to remove a director, they must give notice of that proposal removal to the company or to the board of directors.
The following procedure must be adopted where shareholders wish to remove a director.
FIRST BOARD MEETING
The first step is to call a meeting between the directors of the company, also known as a board meeting.
How to call a meeting?
To call a meeting, all directors must be notified, orally or in writing; there is no specified time this must be called by, but it must be reasonable . Companies may set a required minimum time, and it is worth incorporating this in your articles where the directors agree a minimum notice should be required.
A meeting must have a minimum of 2 directors present and voting, also known as the quorum.
Agenda of the meeting
The directors cannot make the decision to remove a director on their own, unless they have been granted express power under the Articles of Association. Instead, the directors must authorise a general meeting.
They have to approve the 28 days clear notice of this meeting, which has to include the following;
Time
date and place of the meeting
a proxy notice
special notice of the resolution to remove the director
notice to the director of the resolution to remove them.
The board should also draft an ordinary resolution for the shareholders approving the removal of a director.
Voting in the meeting
Voting in this meeting will take place unanimously or by a simple majority on a show of hands.
A director with a conflict
Where there is a conflict of interest, directors may be affected in their ability to vote in the best interest of the company. Therefore, the Companies Act 2006 imposes certain duties on directors. This includes the duty to disclose a conflict of interest to all other directors - ( section 177 of the Companies Act 2006). It is worth noting that there is an exception of disclosing if the interest is their own removal as a director.
Further, a director may not vote or count towards the quorum (parties who are present and voting) in the meeting if they have a conflict of interest. This can be prevented if the model articles of the company so permit a director with a conflict to vote.
GENERAL MEETING
The second step is to call a meeting between the directors and the shareholders - a general meeting.
For the removal of a director, all shareholders and directors of the company must be notified by a special notice, this is a period of 28 clear days or otherwise in accordance with the Articles of the company.
The director, whose removal is concerned, has the right to make written representations on their behalf, and to have the company distribute these to the members in advance of the meeting. Companies cannot use the written resolution procedure to remove a director.
Directors can be required to call a General Meeting by the shareholders and the members can ultimately call the meetings themselves.
Unless the company is a single member company, where 1 person would be enough, a minimum of 2 shareholders are required to be present and voting at the meeting.
The interested director must be given a chance to speak at the meeting. After that, shareholders must pass an ordinary resolution approving the removal of the director.
Voting involves an ordinary resolution - this is a vote which requires more than 50% of the votes in favour. Voting is done on a show of hands, however, a poll vote may be demanded (a vote depending on shareholdings) by a member holding at least 10% of voting shares.
SECOND BOARD MEETING
The last step is to call another board meeting, which follows the same procedure as previously. The only difference being the agenda.
At this meeting, the chairperson will report what resolutions were passed at the general meeting. If the director has been removed from office by or of the shareholders, the board must also pass a board resolution (a vote exceeding 50% as above). The removed director may have a claim for wrongful dismissal and for executive directors, unfair dismissal or redundancy. The secretary instructed, or a director if there is no secretary present, will have to file the documents set out under the post meeting matters.
POST-MEETING MATTERS
In terms of external reporting, companies must inform the Companies House of the removal of the director on form TM01 within 14 days.
They will also have to update internal records and follow the following procedures:
Must update the register of directors.
Must update the register of directors’ residential address.
Draw up minutes of BMs and GM and enter them into the company’s minute books where they must be kept for at least 10 years.
Keep a copy of all meetings and resolutions, even if a sole member company.
HOW CAN DIRECTORS PROTECT THEMSELVES FROM BEING FIRED?
Directors can be protected from being removed by a resolution of the shareholders by:
Provisions in the Company’s Articles: ensuring that the Articles of Association provides appropriate provisions prohibiting the removal of directors by way of resolution.
Being a party to a Shareholder’s Agreement: shareholders who are also directors can enter into a shareholder agreement. They can agree not to use their voting powers to remove each other from their positions.
Having a service contract: will not prevent from being fired but may provide for compensation if they are removed.
Being a director & a shareholder: Bushell v Faith clause, which may give a director who is also a shareholder, weighted voting rights at a general meeting, these can be used to prevent the necessary majority being reached and allow a shareholder to block their removal as a director.
COMPENSATION FOR LOSS OF OFFICE
A director may be entitled to compensation for loss of office. This is up to the discretion of the shareholders. Section 217(1) CA 2006 imposes the requirement for a company to obtain approval by ordinary resolution of the members of the company in order to make a payment for loss of office to a director of the company. There is no set limit in law for such compensation.
However, members’ approval is not required, per section 220 of the Companies Act 2006, where a payment is made in good faith if it is to: discharge existing obligations, by way of damages, part of a settlement, or by way of pension.
Author: Irene Correro-Garcia -
Author: Irene Correro-Garcia -
In partnership with:
DISCLAIMER
This article has been written by law students for the sole purpose of providing informative insight. The information in this article is intended for educational purposes only and does not constitute legal advice, nor should the information be used for the purpose of advising clients. You should seek independent legal advice before relying on any of the information provided in this article.
Sources
Ss215-222 Companies Act 2006
“Employment Income Manual” (EIM12852 - Termination payments and benefits: compensation for loss of office or employment - HMRC internal manual - GOV.UK) <https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim12852> accessed February 28, 2023
GOV.UK, “Terminate an Appointment of a Director (TM01)” (GOV.UKJune 30, 2016) <https://www.gov.uk/government/publications/terminate-an-appointment-of-a-director-tm01> accessed February 28, 2023
