How Can Shareholders Remove A Director From A Company?
All businesses will likely experience some form of internal disagreement during their existence. Tough times can lead to disputes and, naturally, different viewpoints may occur when important decisions have to be made. More often than not, these disputes can be resolved seamlessly, but there are circumstances in which resolution is not possible, and shareholders are left in conflict with directors.
If you are a shareholder of a company, it can be daunting to be faced with a situation where you disagree with the company directors. You will want to resolve the dispute to protect your best interests and the value of your shares. However, it is challenging to determine the best course of action when you are not a director yourself, and many shareholders wonder if they can remove a director from a company entirely.
What Happens When Directors & Shareholders Disagree?
While it is possible for shareholders to remove a director, it is important that shareholders act carefully and follow the appropriate steps before deciding on this method of dispute resolution. Removing a director from the company can be a complex process and will affect the way that all future decisions are made, so consider the alternatives first.
For example, shareholders can try to overrule directors without changing the management structure of the company entirely. To do this and attempt to overturn the decision that has caused the dispute, shareholders need to hold a general meeting and formally request that directors rethink their decision. Only shareholders holding 5% or more of the voting shares in the company have to agree to this meeting for it to be allowed to take place so it is possible to overrule directors in this way even if you are in a minority. However, do bear in mind that this meeting does not guarantee a change in decision and could further amplify tensions between you and the directors.
Shareholders should therefore seek legal advice as soon as possible when faced with a dispute. Prompt advice not only helps to reduce the possibility of a detrimental long-term impact caused by the disagreement but also ensures that you understand the implications of the different options available to you as a shareholder.
The Process Of Removing A Director From A Company
If you are unable to resolve your dispute with a company director, embarking on the process of removing a director from a company is likely to be your next preferred option. While shareholders are not typically required to have a say in the way a company is managed, the articles of association and/or shareholders’ agreement may give you certain decision-making powers which make it easier to remove a director from the company.
To kickstart the process of removing a director from a company, first consult the relevant articles of association and shareholders’ agreement to determine the options available to you. The Companies Act 2006 also offers a statutory process for shareholders wishing to remove a director from a company. As per the Companies Act 2006, shareholders can remove and replace directors if they obtain a majority vote under an ordinary resolution.
Once shareholders have checked their powers, they can request a general meeting on special notice and vote to pass an ordinary resolution to remove the director(s) in question. Directors must be given notice of the meeting and the opportunity for representation in person or writing, and the terms of the articles of association and shareholders’ agreement must always be abided by. For this reason, it is important to gain a complete understanding of your rights and obligations by consulting a specialist dispute resolution solicitor before you attempt to remove a director from a company in this way.
Can A Director Still Work For The Company Once Removed?
If shareholders are successful in passing the ordinary resolution, the director will be removed from their position as a director. However, they will still hold any other positions they hold within the company, such as shareholder status and other employment.
The company director(s) could be entitled to claim for unfair dismissal if they believe the company has failed to follow proper procedure to terminate their employment. It is therefore crucial that your company embarks on a separate process to remove the director from their position of employment. This could involve making a settlement agreement, depending on the director’s role and history with the company.
If the removed director is also a company shareholder, there are additional factors that must be taken into consideration. The director in question does not automatically lose their rights as a shareholder when they are removed from post, and therefore they could still have voting rights and the right to a declared dividend. In these circumstances, it can be preferable to buy back the director’s shares in the company, although it is important to note that they are not obliged to relinquish their shares in this way unless provided for in the company’s constitution, such as within the articles or in a shareholders’ agreement.
You should always seek professional legal advice if you wish to force a sale of company shares, as the director would be entitled to claim against you if the correct procedures were not followed.
How GA Can Help Shareholders Resolve A Dispute
Whether you follow the statutory process for removing a director from office or use your company’s governing documents to remove them, it’s vital that shareholders protect their own position and act in accordance with the law to prevent any claims being made against them by directors.
Whether you believe you have fully exhausted all of your dispute resolution options, need to fully resolve matters by terminating a director’s employment and sorting out their shares, or wish to draft a shareholder’s agreement to prevent this kind of scenario from arising in the future, our team of dispute resolution solicitors can help. Shareholders should always seek legal advice from the very outset of a dispute, and our experienced team will offer the transparent and timely advice you need to make effective, business-first decisions.
For an honest discussion with a business dispute specialist, contact us on 01752 203500 or email us at enquiries@GAsolicitors.com
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