Disagreements are common and a natural aspect of running a business. Major issues arise when disputes become complex and protracted. The time may come when the shareholders of a company need to make important decisions regarding the management of their company. If the shareholders are unhappy with how the company is being run, they may decide to remove a director from the board.

There are several ways to terminate the office of a director, but it depends on how the company was incorporated. It is common to find that a director is also a shareholder of the company, which may make a removal more complicated. A director may also have a services contract or be an employee of the company, in which case the company, as an employer must adhere to employment rules, regulations and the terms of the contract governing the relationship.

The Model Articles of Association provide that directors may be automatically removed from office for several reasons. Their position is automatically terminated for example, if they have been (i) disqualified, (ii) declared bankrupt or (iii) have been suffering from substantial mental or physical incapacity. If a company has used amended Model Articles or adopted bespoke articles, various additional more specific provisions may be included to provide for the automatic termination of a director’s office and these provisions can be entirely unique to the company. However, if the shareholders want to remove a director for another reason, they will need to do so by resolution.

Section 168 of the Companies Act 2006 gives shareholders the power to remove a director via ordinary resolution, requiring more than 50% of shareholder votes. This can be passed for any reason provided appropriate procedure is followed. A general meeting of the Company needs to be called and special notice of 28 clear days must be given to all shareholders of the Company of the intention to vacate the director’s office. The director will subsequently receive notice from the company of the shareholders’ intention to remove them. It is not possible to use the written resolution procedure to remove a director and the resolution must be passed at a general meeting.

The director has the right to protest their removal and upon receiving notice of intention, can make written representations for circulation to shareholders or choose to speak at the general meeting itself. If a director is also a shareholder, they have the statutory right to vote in the general meeting on their own removal. If provided for in the Articles of Association, a shareholder may even have increased voting rights when a vote on their own removal has been called. This is known as a ‘Bushell v. Faith clause’ and it can effectively prevent a director’s removal by resolution if a disagreement arises with other shareholders. For example, in the event of a disagreement between three shareholders, two of the shareholders would be unable to remove the third shareholder because all shareholders avail of increased voting power in the event their own removal is to be voted on. This emphasises the importance of incorporation planning as well as highlighting the difficulties that may arise when trying to remove a director.

Further issues may subsequently emerge from the removal of a director if they are also a shareholder, including but not limited to, derivative claims, winding up of the company and claims of unfair prejudice. Claims for compensation or damages based upon a breach of contract for employment or services may also be made. If a services or employment contract does exist, removal of office is still possible, but it will be important for the shareholders to consider settlement or any compensation due in the event of termination before deciding on removal.

If you wish to discuss any of the points raised in this article or any matters relating to intellectual property, please contact the Corporate and Commercial team at MKB Law.