Disputes between shareholders and directors aren’t uncommon, particularly in closely held companies. When trust breaks down or disagreements arise about how a company is being run, shareholders may start asking whether they can remove a director from their position.
While shareholders do have the power to remove a director in many situations, the process isn’t always straightforward. Company law, the company’s constitution and any shareholder agreements all play an important role.
In this article, we explore whether shareholders can remove a director, how the process works and what factors need to be considered before taking action. We also explain how to arrange a free 30-minute consultation with a dispute resolution solicitor to discuss your situation.
Can shareholders legally remove a director?
In many cases, shareholders can remove a director from office. The primary legal basis for this power comes from the Companies Act 2006, which allows shareholders to remove a director by passing an ordinary resolution.
However, this statutory right must be exercised correctly. Failing to follow the proper procedure can make the removal invalid and expose the company to legal claims.
It’s also important to understand that while shareholders may be able to remove a director from office, this doesn’t automatically end any separate employment or service contract the director may have with the company.
How shareholders can remove a director under the Companies Act
Under the Companies Act 2006, shareholders can remove a director by passing an ordinary resolution at a general meeting. This means that more than 50 percent of the votes cast must be in favour of removal.
Special notice is usually required. The company must receive notice of the proposed resolution at least 28 clear days before the meeting. The director concerned has the right to be informed of the proposed removal and is entitled to make written representations and speak at the meeting.
These procedural safeguards are designed to ensure fairness and transparency. Ignoring them can lead to disputes and legal challenges.
The role of the articles of association
A company’s articles of association can affect how and when a director can be removed. Some articles include additional protections for directors, such as enhanced voting requirements or specific procedures that must be followed.
In some cases, certain directors, such as founders, may have special rights that make removal more complex. It’s essential to review the articles carefully before taking any steps.
While the Companies Act gives shareholders a general right to remove directors, the articles may influence how that right is exercised in practice.
Shareholder agreements and director removal
In addition to the articles of association, any shareholder agreement must be carefully reviewed. Shareholder agreements often contain specific provisions dealing with the appointment and removal of directors.
These agreements may set out additional steps that must be followed, require higher voting thresholds or give certain shareholders veto rights. In some cases, a shareholder agreement can create contractual obligations that sit alongside the statutory process under the Companies Act.
Failing to comply with a shareholder agreement when removing a director can result in breach of contract claims, even if the statutory removal process is technically followed.
What if the director is also a shareholder?
Removing a director becomes more complex when the individual also holds shares in the company. While shareholders may be able to remove the person as a director, they can’t usually force them to give up their shares.
This can lead to ongoing disputes, particularly in small companies where relationships have broken down. In some cases, the removed director may bring an unfair prejudice claim if they believe the removal was conducted in a way that is unfair or harmful to their interests as a shareholder.
Deadlock situations are common in companies with equal shareholdings. These disputes often require negotiation, mediation or court intervention to resolve.
Consequences of removing a director
Removing a director can have wider legal and commercial consequences. If the director has an employment or service contract, removal from office may trigger claims for wrongful dismissal or breach of contract.
There may also be reputational, operational and financial impacts on the business, particularly if the director played a key role in the company’s management or client relationships.
For these reasons, it’s important to consider the broader implications before proceeding with removal.
Common mistakes businesses make
Director removal disputes carry a high risk of litigation. Getting the process wrong can expose the company and its shareholders to significant legal and financial risk.
One of the most common mistakes is acting hastily without understanding the legal framework. Failing to follow the correct procedure, ignoring contractual protections or allowing emotions to drive decisions can quickly escalate a dispute.
Another common issue is assuming that removal as a director resolves all problems. In reality, it often marks the beginning of a wider dispute if matters aren’t handled carefully.
Speak to a dispute resolution solicitor about director removal
If you’re considering removing a director or are facing a dispute with shareholders, professional advice can help you understand your options and protect your position.
A dispute resolution solicitor can advise on the correct procedure, assess the risks involved and help you achieve the best possible outcome, whether through negotiation or formal action.
Please note that this article is solely for informational purposes. It’s not a substitute for legal advice. We encourage readers to contact Osbourne Pinner for case specific guidance.
We offer a free 30-minute consultation to discuss your situation. You can speak with us via video call or visit our offices in Harrow, Canary Wharf, Piccadilly Circus or Manchester. To arrange your consultation, call 0203 983 5080, email [email protected] or complete the form below.
