Gordon: We often deal with situations where directors have to be removed from a company for one reason or another. James, what circumstances are you seeing where you’re approached by clients wanting to remove a director from the board of companies?

James: Well at the inception and incorporation of a business, everybody has great intentions of propelling the interests of the business forward and everybody generally gets on. Intentions only take you so far and there may come a time when either a director needs to walk away, or they need to be removed. There could be any number of things that have happened in that intervening period – sometimes it can just be a change of direction of where the business is going, or it can delve more into the duties of a director. A director could feel that the other directors are not fulfilling their duties as specified under the Companies Act. They might say that there’s a lack of trust between the directors, there’s conflict with shareholders or their board members, or there’s perhaps restructuring going on in the business and as part of that process, a director needs to be removed.

Gordon: A director who doesn’t want to be removed, needs to be removed!

James: Yes, and it takes you on to words like incompetence, misconduct, mismanagement, all sorts of things.

Gordon: Let’s say I and four or five others are shareholders in a business and we’ve appointed Joe Bloggs as a director but we’re very unhappy with the way in which he is conducting himself as a director of this business – can we just sack him?

James: If I’m dealing with you as a hypothetical client, Gordon, I’m glad you’ve come to me to ask. Sometimes people will take it upon themselves just to go on to Companies House and their statutory books and remove the director, and that’s not following proper corporate governance and it’s not entirely legal either. So, you need to make sure that you’re following the correct procedure. The first place to start is, of course, the Companies Act 2006. Make sure that what you’re going to do and what you’re proposing to do is, compliant with that Act. You need to look at the company’s Articles of Association and again, that sets out the general governance of the company. Are there any shareholder agreements in place? Are there any director service agreements in place?

Gordon: So, I could, under a shareholder’s agreement or even the articles, just have a right to remove a director?

James: Well, it depends on what’s contained inside those agreements. There’s also the possibility that the director is an employee. Now, we’re not going to delve into employment law. But it’s something to consider because if they’re an employee, there’s going to be all sorts of rights attached to their position as director.

Gordon: And I’ve no specific right to remove this director and having tapped him on the shoulder, he has indicated that he doesn’t want to go, perhaps in quite strong language, what do we do?

James: That brings us on to a very specific portion of the Companies Act 2006, Section 168. If the director does not want to go, it’s up for the shareholders of the company to remove the director via an ordinary resolution. An ordinary resolution of the members needs a simple majority to pass, so that’s 51% or above.

Gordon: Doesn’t need to be a special resolution, doesn’t need to be a 75% majority, just straight majority of the shareholders?

James: That’s correct, yes. Sometimes people will go down that route of using written resolutions to remove directors of the company. But again, that’s not the process that needs to be followed here, it must be passed by an ordinary resolution.

Gordon: So there has to be an actual meeting of the shareholders?

James: Correct and that meeting needs to be structured in a particular way as well. There has to be a special notice of the meeting given with 28 clear days and that has to be given to all of the members. Which is even more notice than a special resolution. So that’s 28 clear days to all the members, including the director that you’re seeking to remove – even if he’s not a shareholder. The reason that you would be giving him notice is because he will be attending that meeting. He has the right to attend.

Gordon: That’s got the capacity to be embarrassing for everybody!

James: Yes it could make for an interesting general meeting. But they have to be able to make representations of why they should or should not in these circumstances be removed as a director. These can be written representations where they can simply turn up to the meeting and make their point clear that they should not be removed.

Gordon: And once they’ve made that point, who arbitrates on it? Who says, “oh, we’ve heard what you have to say and we think you’re quite right, you shouldn’t be removed as a director”.

James: In that case, it comes down to the vote that has to be taken at that general meeting. Again, it’s going to be the members who are making this decision. If a simple majority can be reached, then the director will be removed. But if the director has come along to the meeting, has pled their case and the members are convinced, then they have the authority to say, actually, no, we’re not going to vote in favour of his removal.

Gordon: For many of the close companies with five members or less that we see in practice, actually, is the meeting going to be a foregone conclusion much of the time?

James: Sometimes, yes, it might be. Other times not. Something you have to consider is this director may be a member himself so he may well have the right to vote at the meeting. There’s something that we came across a few years ago called the Bushel vs Faith Clause that can be contained within Articles of Association, and that can change the weight that is attributed to these voting rights in the event of a director being removed. It’s something you would often see in your company’s articles of association. For example, a disagreement does happen and say between three shareholders and two of the shareholders would be unable to remove that director shareholder because all the shareholders could avail of that increased voting power because of that Bushel vs Faith Clause. So it’s something when you’re sitting down with clients and talking about incorporation and how they want the structure of their company to be formed, it’s something to suggest to them.

Gordon: Good faith provisions and shareholders agreements, that might be an area for discussion on another day! I think that covers shareholders wanting to remove a director who doesn’t want to go. Are there any other circumstances where shareholders are just automatically removed?

James: There are indeed. Sovereignty and control of the company is generally with its directors and shareholders, but you have to remember that the structure of a company is governed with and by legislation. There are certain authorities that can disqualify directors regardless of what the members want to do in these scenarios. Directors can be removed from their position from a board of directors, including Companies House, the Insolvency Service, the Courts, the Financial Conduct Authority, the Competition and Market Authority – there’s a whole suite of bodies that can indeed bring forth this sort of disqualification of directors.

Gordon: What about the director who sadly becomes incompetent through ill health or for whatever reason from acting as a director? Do you have to go through this process in order to remove them from the board?

James: There used to be legislation that was quite clear about mental incapacity for directors, but we live in an age where we have greater understanding and awareness of mental health. The legislation has transformed that – that’s not a straightforward process to remove directors simply because of alleged or thought mental incapacity.

Gordon: The articles which we usually draft allow a director to be removed if a medical practitioner serves a certificate on the board to say that they’re no longer capable of acting. I have seen circumstances where that becomes very contentious.

James: Absolutely. Moving on to that process then, so if this authority is going to disqualify the director, what happens in that scenario Well, they bring forth this sort of allegation of whatever has happened. The director will still have a chance to defend those accusations. It’s not a case that they’re simply automatically disqualified, so they can choose to defend their position. They can choose to step down voluntarily.

Gordon: Even in the event of bankruptcy?

James: Not in the event of bankruptcy. I suppose that’s bringing us on to a different matter. But certainly if there’s alleged misconduct or mismanagement of company finances that falls within that criminal capacity, there is an opportunity for directors certainly to submit their defence. But in the case of bankruptcy, it’s probably a little more clear cut.

Gordon: What about criminal offences? I think we’ve all seen situations where members of a board have taken great objection to the fact that one of their colleagues is accused but not prosecuted as yet for a criminal offence. Can you use that to force a director to step down from the board?

James: In that case, you may want to go down the avenue we’ve previously talked about, that the member’s ordinary resolution. Without a conviction, they haven’t committed a criminal offence.

James: So Gordon, a hypothetical question. You have two directors who are also the two members of the company, and there’s equal rights attached to their shares. And for whatever reason, they can no longer work together. Somebody has to go. Somebody has to be removed. What’s the process for doing that? Are we thinking about buy-outs? Are we thinking about involving the court in some sort of way? What sort of remedy is there for the directors?

Gordon: In very simple terms, none of what we’ve discussed previously about removing directors can apply because there’s no majority. So we need to think about liquidation and perhaps unfair prejudice petitions then but that’s a huge topic which we can return to at another time.

James: In closing, removing a director is a very serious decision for a company to make, so take advice. Take advice of incorporation of your company and if you’re seeking to remove a director, take advice then before you make any of these far-reaching decisions.