6 rules for removing a director

July 5, 2016

In this blog, we look at how to remove a director. Directors are often employees as well as officers of a company. Care needs to be taken when removing a director from his office and terminating his employment to avoid legal claims.

We have set out in this blog the steps that a company should follow when removing a director.

 

 

 

 

1.     Check the terms of service agreement, employment contract or letter of appointment

It is important to check the terms of any director’s service agreement, employment contract or letter of appointment to see what terms have been agreed with regard to the termination of a director’s employment. If the contract is silent on this point or there is no contract and the director is an employee, then we recommend that you take legal advice to assess the most appropriate course of action. Care needs to be taken so that you do not end up with a claim for unfair dismissal.

 

2.     Check the Company’s articles of association and shareholders’ agreement

The articles of association of the company (and shareholders’ agreement if one has been signed) are very likely to contain provisions which set out when a director can be removed from his office. If the articles are silent on this point, you should check whether the Model Articles are incorporated into the articles or Table A if the Company was incorporated under the Companies Act 1985. Both the Model Articles and Table A contain automatic rights to terminate a director’s appointment if certain circumstances apply.

3.     Procedure under section 168 of the Companies Act 2006

If there is no right to terminate a director from his office under the articles of association, then it is possible for the shareholders of the company to remove the director from his office by an ordinary resolution provided that the strict procedure under the section 168 of the Companies Act 2006 is followed.

 

Special notice must be given to the director concerned and the shareholders of the company at least 28 days before the general meeting at which the shareholders will vote on the ordinary resolution.

 

Directors are only required to call a shareholders meeting once the company has received requests from shareholders with voting rights holding the required percentage of the paid-up capital of the company.

 

The director concerned will be entitled to be heard at the general meeting where the resolution to remove him or her is proposed. The director is also entitled to make representations to the company.

 

If the directors fail to convene a general meeting, then the shareholders who requested the meeting may hold one at the company’s expense provided that it takes place within three months of the date when the directors became subject to the requirement to hold it.

We recommend that you seek legal advice if you are to follow the Companies Act 2006 procedure to remove a director.

4.     Claims against the director

If there are any disputes or claims against the director, then we recommend that you take legal advice before you serve your notice or invoke any procedures under the Companies Act 2006 or the company’s articles of association. The company may wish to consider negotiating with the director instead and signing a settlement agreement relating to any claims.

 

5.     Companies House filings

A form TM01 needs to be filed at Companies House once the director has been removed so that the director is no longer shown as being an officer of the company.

6.     What if a director owns shares in the company?

Many directors will own shares in the company. A company should always check the terms of the articles of association and the shareholders’ agreement (if there is one) to see what will happen to the shares when the director is removed. In many cases, the shareholders’ agreement or articles will contain deemed transfer provisions that state a share sale notice will be served when a director is removed. There may also be good and bad leaver provisions that also contain additional valuation provisions.

Conclusion

Removing a director from their employment and office can be a complicated process with many legal issues to consider. We recommend that you take legal advice before invoking any procedures under a director’s service agreement, articles of association or the Companies Act 2006.
For any further advice on the points raised in this blog, please contact LawBite.

 

Annelie Carver – LawBite LawBrief. For further legal advice you can contact Annelie via our online legal advice portal.