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If you are a shareholder of a company and have concerns about how the directors are running it, you might want to remove those directors from office. There are a number of ways a director can be removed and it is important to seek specialist legal advice before taking any steps.
Some key points which you should think about are:
- Is the director also an employee?
In many cases, a director is also an employee of a company. You should seek specialist advice before starting a termination process to ensure that it does not give rise to any employment claims. It is often the case that articles or shareholders’ agreements compel departing directors to divest themselves of shares in the company to ensure a clean break – unless they have been unfairly dismissed. It is therefore crucial that, when dismissing a director, you follow the correct procedures.
- Articles of association.
This is a legal document governing a company. It should contain provisions setting out the circumstances in which a director can be removed from office. Many companies adopt the “model articles” provided by Companies House.
Under the model articles, a director can be removed by voluntary resignation, if a bankruptcy order is made against them, if they become medically unfit, by ordinary resolution of the shareholders or by order of the court.
In more bespoke articles, a parent company or investor might have enhanced voting rights to give it more control over board appointments and removals. In other cases, founders and substantial shareholders might have the right to appoint a director or to exercise weighted voting rights to prevent the majority of shareholders from removing them as a director (often referred to as Bushell v Faith clauses).
If a director is abusing his or her position and is a majority shareholder or has enhanced voting rights, the articles are unlikely to provide a resolution for you (the director would block any ordinary resolution).
- Shareholders’ agreement
If the director complained of is also a shareholder, you might have agreed a shareholders’ agreement at the outset. This might include provisions for termination of a directorship and should be reviewed carefully.
- Unfair prejudice
If you are a minority shareholder and the other shareholders (one of whom could be the director in question) do not agree that the director is prioritising his own interests over other shareholders, you might be able to present an unfair prejudice petition. The court has a wide discretion if it finds that the conduct was unfairly prejudicial, and might either direct the management of the company or order that certain shareholders are bought out for fair value.
Examples of conduct which has been found to be unfairly prejudicial include a director withdrawing excessive remuneration from the company or a director excluding minority shareholders from management.
- Derivative claims
In some cases, a director or cabal of directors manage to manoeuvre themselves into a situation where they control the company for their own benefit and even a majority of shareholders cannot remove them. In that case, a shareholder can apply to the court for permission to step into the company’s shoes to bring a claim against a director. This is known as a derivative claim. Although derivative claims were once rare, recent legal developments and an increase in shareholder activism mean that we are regularly advising in relation to derivative claims.
The above are just a few key points to consider. There is no “one size fits all” solution and specialist advice is needed to consider the best approach. Please contact Morgan Rees and George Gwynn if you would like to discuss concerns about a director’s conduct.