The removal of a director

Most employers will have some understanding of how to deal with the dismissal of an employee.

But how do directors or shareholders of a private limited company remove an employee who is also a director and shareholder? 

The starting point will be the company’s governing documents (its memorandum and articles of association) and any shareholder agreements.  These documents set out arrangements between the company, its shareholders and directors.  General company law, especially set out in the Companies Act 2006, is also relevant.

The simplest (and most efficient) route is to agree with the relevant director terms upon which he will resign.  The continuing directors can then accept this resignation and arrange for an appropriate notification to be made at Companies House.  The directors should also consider any other steps that need to be taken, such as amending the company’s bank mandate.

The director’s resignation should both be as an officer and as an employee.  In order to protect the company, the company should procure the director’s signature to a compromise agreement.  This compromise agreement is a binding agreement between the company and the director to settle all certain proceedings in connection with his removal and avoids the suggestion that his resignation was forced. 

If a director is not willing to resign, then the shareholders can follow the statutory procedure under the Companies Act 2006.  A director can be removed by an ordinary resolution passed by shareholders at a general meeting.  The shareholders must serve a special notice on the company first.  This special notice must be copied to the director who is to be removed.  This allows the director time to send written representations protesting against his removal.  If these representations are not sent to the company in good time for circulation, then the director can have them read out at the general meeting.  The general meeting cannot take place within 28 days of the special notice being served on the company.   

The other directors and shareholders may want the outgoing director to cease owning shares in the company.  The outgoing director may willingly sell his shares back to the company, or to any of the other shareholders.  However, if he is less willing then there may be procedures under the Companies Act available which recognise, that once an offer for not less than 90% of the company’s shares and voting rights has been accepted, the potential buyer should be able to buy out the minority on the same terms. 

Prasan Modasia

©  Barker Gotelee