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It is an unfortunate but predictable fact of commercial relationships that, at some stage, they are likely to encounter conflict. This may be a "bump in the road" or perhaps something more serious and lasting. Disputes between company shareholders and directors normally fall into the latter category. The classic situation is where, in the context of a relatively small company, disputes emerge between the shareholders. One or more of those shareholders will also be a director of the company. Since directors make the day-to-day decisions, they will be the first targets when relationships break down. Sometimes this is because the other shareholder(s), who may themselves be directors, no longer wish to work with that director and therefore would prefer to remove the director from the Board. In other words, it is entirely a question of personality rather than the competence of that director to continue managing the company. On other occasions, the shareholders may be concerned by management decisions being taken by the director and feel that those decisions are detrimental to the company's future and consequently to their interests as shareholders.
Then the question arises, is it possible to remove a company director from office and, if so, how?
The answer to the first question, namely whether it is possible to remove a company director, is Yes. After all, the shareholders appointed the director and they have every right to remove him/her. Fortunately, the procedure itself is relatively straightforward. That is subject to the usual legal caveat that every case turns on its own facts. For example, a director who resists tooth and nail may ultimately be removed but not before he/she has dragged the company through the mud and forced it to expend vast resources on his/her way out. Given this, it is always best to try and sort the matter out amicably where possible, by politely asking the director to leave and, if that does not work, by attempting to cajole them, then coax them and finally smoke them out (not literally of course – let's not make a bad situation much worse).
With that in mind here are the steps for removing a company director:
Arrange an informal meeting with the director and explain that you, as a company shareholder, are unhappy with their performance and would like them to resign as director. Explain the reasons for this. Naturally, this step can only work if there is not already bad blood between the parties. It is a good idea for the meeting to be attended by only one of the shareholders so that the director does not feel intimidated. However, it is a good idea to get as many shareholders as possible on board before arranging the meeting.
Assuming the director refuses to resign, write a formal letter requesting the same thing you requested at the meeting. The tone of the letter is going to be more matter-of-fact than the chat you had at the meeting. For one thing, the letter should give the director a deadline for resigning and should set out the consequences if he/she refuses to resign or does not meet the deadline.
What are those consequences? It should be stated that, if the director does not resign within the deadline period, the company will be forced to convene an Extraordinary General Meeting (EGM) at which a resolution will be tabled for the removal of the director pursuant to section 146 of the Companies Act 2014. The letter should be signed by each of the shareholders requesting the director to resign.
The intended removal of a company director is one of the situations where, in our experience, ADR works well. It is not always correct to say that ADR will save the company time or money in these situations since the alternative is not necessarily long and expensive court proceedings (see Step 4 below); however, it does allow the parties to avoid the kinds of hostilities which often arise at EGMs for the removal of a director and which tend to linger long afterwards (especially when the director who is to be removed is also a shareholder and can continue to make life difficult for the company after being removed as director). Therefore, we strongly advise considering the option of inviting the director to mediation. Since the parties are unlikely to be on talking terms by this stage, the mediation is normally conducted such that the parties are in different rooms with the mediator going from one to the other with a view to trying to reach a settlement.
As mentioned earlier, removing a company director is relatively straightforward on the face of it. It is made straightforward by section 146 of the Companies Act 2014 which enables a director to be removed from office by an ordinary resolution of the company's shareholders. In other words, all you need is 50% plus 1 of the shares voting at a general meeting. Since the section makes the requirement quite clear, there is no point in proceeding to call an EGM if you do not have the numbers. Therefore, you need to either control more than 50% of the company's shares or have enlisted enough of the other shareholders such that you have the votes to pass the resolution.
There are certain formalities which apply to the EGM and it is absolutely imperative that they are properly observed. A failure to observe them correctly will result in having to start the procedure from the beginning. For example, section 146(3)(a) requires that the person intending to pass the resolution shall give at least 28 days' notice of it to the company. Section 146(3)(b) states that the director is entitled to be heard at the meeting where the resolution is to be proposed. It is worth noting that company shareholders are not entitled to call an EGM as a matter of right – the company's directors have the power to call the EGM after receiving notice of the proposed resolution to remove one of them. If the directors refuse to call the EGM then they can be forced to do so, a procedure beyond the scope of this article.
The resolution will be voted upon by the shareholders, including the director who it is intended to remove (if he/she attends the EGM and decides to vote). If the resolution is passed then this will be recorded in the Minutes of the meeting and the director is then deemed to be removed. There may also be another resolution at the same meeting to appoint another director in place of the one just removed. If that is the case then it is important to bring to the EGM a signed statement from the intended replacement stating that he/she agrees to accept the appointment as director.
The form B10 is required to be filed electronically with CRO within 14 days of the removal of the director. The duty to file the form is on the company and not the shareholder who instigated the removal of the director.
The fact that a director is a shareholder does not of itself prevent their removal under section 146 of the Companies Act 2014. However, it is important to note that removal from the office of director does not affect their shareholding, meaning that they will continue to have an interest in the company and be entitled to vote at company meetings in the same way as every other shareholder. It sometimes happens that a director-shareholder, who will naturally be a minority shareholder for section 146 to have been successfully invoked against them, subsequently uses their voting rights as a shareholder to obstruct the company whenever possible. There is, unfortunately, very little that can be done to counter this behaviour. Indeed, it is one of the reasons why it is always advisable to seek to remove the director through mediation instead of resorting to section 146. It may be possible in a mediation to reach a deal for the purchase of the director's shareholding and thereby achieve a clean break.
If the director holds exactly 50% of the company's shares with voting rights, a situation which often arises in the context of small two-person companies, then the procedure for removal under section 146 will not work. It will not be possible to pass the resolution needed to remove the director. What normally happens in these cases is that companies effectively become ungovernable because the only two shareholders - each with a 50% shareholding – are at loggerheads. If mediation cannot resolve the situation then there are other legal routes for forcing the removal of one director and the compulsory purchase of their shares, but section 146 is not the way to do that.
If the director has an employment contract with the company then he/she will be protected by contract and employment law in the same way as any other employee. This creates the anomalous situation where a director may lawfully be removed as an officer of the company pursuant to section 146 but such removal may result in a breach of employment rights and indeed may result in a claim for unfair dismissal. It is important to seek the appropriate legal advice in advance of removing a director since every case will naturally be decided on its own facts.
The removal of a company director is an unpleasant but often necessary course of action. While it is advisable to try and achieve this amicably by way of voluntary resignation where possible, the more heavy-handed approach contained in section 146 is often the only way of doing so. That procedure does not envisage any court application but I have dealt with cases where a court application arises because a director simply refuses to leave or where they take important company property on their way out.
Author: Mahmud Samad BL
Publication date: 15th December 2022