#14699 - Removal Of A Director - Business Law and Practice

Removal of a Director

Removal by the Shareholders

The shareholders can remove a director by passing a removal resolution under s.168(1). Shareholders must give special notice to the company at least 28 days before the vote (s.312(1) & s.360(1)) which must be sent to the director being removed (s.169(1)).

The directors are entitled to refuse to place the removal resolution on the agenda for the general meeting (Penley v Inland Waterways), if this occurs then the shareholders have the power to require the directors to call a general meeting under s.303(1). This must be done by shareholders owning at least 5% of the paid up voting share. The s.303 request will state the resolution proposed and the nature of the business.

The directors then have 21 days in which to call the meeting for a date not more than 28 days after calling the meeting (s.304(1)). If the directors continue to fail to do this then the shareholders have the power to call the meeting themselves (s.305).

At the general meeting the director being removed has a right make written representations (s.169(3)) and speak in their own defence at the general meeting (s.169(2)).

Settlement Agreements

Often settlement agreements will be agreed as part of removing the director. The agreement must comply with s.203 which requires the agreement to be in writing and specifically state what claim is being settled by the agreement. The agreement must also identify an independent advisor who has PII (Professional Indemnity Insurance).

An ordinary resolution will be required under s.211 for any ex gratia payments to the director. The first 30,000 of genuine compensation will be tax free.

When drafting a settlement agreement the employee and employer will have different aims:

Procedure Plan

Claims by the Director

Shareholder Agreements

If the director is also a shareholder and a shareholders’ agreement is entered into which requires the shareholders to vote unanimously on the removal of a director then the shareholders will be in an entrenched position.

The director can still be removed, but the director will have a breach of contract claim against all of the shareholders personally who voted to remove him.

The company is able to be part of the shareholders’ agreement as long as it does not fetter or restrict their powers under CA 2006.

Unfair Prejudice

A director can claim under s.994 for unfair prejudice if the company’s affairs have been managed in a way which is unfairly prejudicial (s.994(1)). The court has the power to order any relief they deem appropriate. It is common to require the company or the shareholders to buy-back the shares of the outgoing director (s.996(1)-(2)).

Derivative Actions

The general rule is that where the wrong has been done to the company, the company is the proper claimant (Foss v Harbottle). Exceptions to this rule allows shareholders to bring derivative actions on behalf of the company (s.260(1)).

A director must have committed a breach of duty (i.e. their duties under s.171-177), committed a breach of trust, been negligent or in default (s.260(3)).

The shareholder must get court approval to continue the claim by establishing a prima facie case (s.261(1)). The court will refuse to grant permission if the director was acting in accordance with s.172 or if the action was authorised or ratified by the company (s.263(1)(a)-(c)).

The court will consider the following factors when deciding whether to allow the action (s.263(3)): good faith, the company’s decision not to pursue the claim, the best interests of the company, any likelihood of...