How to remove a director

It is an unfortunate but predictable fact of any business relationship that, at some stage, you are likely to encounter conflict.

This may just be a “bump in the road” or something more serious.

Disputes between company shareholders and directors normally fall into the latter category.

This situation often arises in a small business.

And generally, one or more of the shareholders are also company directors.

Since directors make day-to-day decisions, their positions often become tenuous.

This is because the other shareholder(s), who may also be a director(s), no longer wishes to work with that director and, therefore, would prefer to remove him/her from the Board.

It may be a question of personality rather than the competence of that director.

Or perhaps the shareholders are concerned by the management decisions and feel that those decisions are detrimental to the company’s future and interests.

The question then arises, is it possible to remove a company director from office, and if so, how?

 

Steps for removing a company director

 

The answer to the first question, namely whether it is possible to remove a company director, is Yes.

After all, the shareholders appointed the director, and they have every right to remove him/her.

The procedure is relatively straightforward but depends on the director’s position.

A director who resists tooth and nail may ultimately be removed, but not before he/she has dragged your company through the mud and forced it to expend vast resources on his/her way out.

Given that this is a common position in many small businesses, it is always best to sort the matter out amicably, where possible, by politely asking the director to leave.

If that does not work, you can attempt to cajole him/her, then coax and finally smoke them out (not literally, of course – let’s not make a bad situation worse.)

With that in mind, here are the recommended steps for removing a company director.

Step 1: Arrange an informal meeting seeking the director’s resignation

Arrange an informal meeting with the director and explain that you, as a company shareholder, are unhappy with their performance and would like them to resign as director.

Explain the reasons for this.

Naturally, this step only works when the parties have no bad blood.

Where there are other shareholders in the business, it is important that you get as many shareholders as possible on board before arranging the meeting.

Step 2: Write a formal letter requesting a resignation

Assuming the director refuses to resign, write a formal letter requesting his/her resignation.

The letter should give a deadline for resigning and set out the consequences if he/she refuses to resign or does not meet the deadline.

What are those consequences?

It should be stated that if the director does not resign within the deadline period, the company will be forced to convene an Extraordinary General Meeting (EGM) at which a resolution will be tabled for the removal of the director pursuant to section 146 of the Companies Act 2014.

Each shareholder should sign this letter.

Step 3: Alternative Dispute Resolution (ADR)

A company director’s intended removal is one situation where ADR works well.

It allows for the parties to avoid the kind of hostilities which often arise at EGMs for the removal of a director and which tend to linger long afterwards (especially where the director who is being removed is also a shareholder and can continue to make life difficult for the company after being removed as director).

Therefore, we always recommend the option of inviting the director to mediation.

Step 4: Follow through on the threat of section 146 of the Companies Act 2014.

As mentioned earlier, removing a director is relatively straightforward on the face of it.

Section 146 of the Companies Act enables a director to be removed from office by an ordinary resolution of the company’s shareholders.

All you need is 50% plus 1 of the shares voting at a general meeting.

There is no point in calling an EGM if you do not have the numbers.

Therefore, you must either control over 50% of the company’s shares or have enlisted enough other shareholders to ensure you have the votes to pass the resolution.

Certain formalities apply to the EGM, and it is important that they are properly observed.

Check out our guide on the procedure here

Step 5: Resolution to remove a director

The resolution will be voted upon by the shareholders, including the director whom it is intended to remove (if he/she attends the EGM and decides to vote).

If the resolution is passed, this will be recorded in the Minutes of the meeting and the director is deemed to be removed.

There may also be another resolution at the meeting to appoint another director in place of the one removed.

If that is the case, it is important to bring to the EGM a signed statement from the intended replacement stating that he/she agrees to accept the appointment as director.

Step 6: “Notice of change of directors” Form B10 with CRO

A Form 10 is required to be filed electronically with the CRO within 14 days of the removal of a director.

The duty to file the form is on the company and not the shareholder who instigated the removal of the director.

You can find more about a Form 10 here

 

What if the director is also a shareholder of the company?

 

The fact that a director is also a shareholder does not prevent their removal under section 146 of the Companies Act 2014.

However, it is important to remember that the removal of a director does not necessarily affect their shareholding, meaning that they will continue to have an interest in the company and be entitled to vote at company meetings like every other shareholder.

It sometimes happens that a director-shareholder subsequently uses their voting rights as a shareholder to obstruct the company whenever possible.

However, this situation can be avoided with the right clause in your Shareholders Agreement, which results in a share transfer to the remaining shareholder(s) once a director-shareholder is removed.

Check out our guide on Shareholder Agreements

 

What if the director is also an employee of the company?

 

If the director has an employment contract with the company, he/she will be protected by contract and employment law like any other employee.

The requirement for procedural fairness will then arise.

This creates a situation where a director may be lawfully removed as a director of the company, but the removal may result in a breach of employment rights and a claim for unfair dismissal.

Therefore, it is important that you consider any contractual or employment rights that may apply before removing any director.

Generally, an employment contract allows for removing a director on specific grounds – fraud, bankruptcy etc.

If any of these grounds can be justified then the director can be removed.

If the director is also a shareholder, they may also have a remedy for oppression in the conduct of the company’s affairs under minority protection.

 

What happens when you have 50:50 shareholders?

 

It is common in many small businesses that the shares are split 50:50 between the founders.

Both shareholders are generally also the directors.

Section 146 will not work to remove the director in this situation because neither party will control over 50% of the vote.

In these cases, companies normally become ungovernable because the only two shareholders – each with a 50% shareholding – are at loggerheads.

If mediation cannot resolve the situation, then there are other routes for forcing the removal of one director and the compulsory purchase of their shares.

But section 146 is not the way to do that.

 

The company’s constitution

 

Powers may also exist in your company’s constitution to remove a director.

This includes any right for the board to remove a director by writing, for example.

You should review your constitution to see what, if anything, it allows for.

You can amend your constitution at any time to include additional and more administratively efficient methods of removing directors.

 

The importance of a Shareholder’s agreement

 

To avoid the company becoming unmanageable, it is important to have a shareholder agreement in place.

Removing a director who is also a shareholder can then become easier.

This is especially the case where shares are held 50/50.

Most decisions for shareholders require over 50% of the votes.

That includes the removal of a director.

If such a situation is not properly addressed in a shareholder’s agreement, deadlock arises, and the company cannot function.

Use our Shareholders Agreement – 50:50 shareholding template to get the protection you need.

Equally, a director’s service level agreement is vital to govern the relationship with your co-founder(s).

It should set out the basis on which a director can be removed.

 

Conclusion

 

Removing a company director is an unpleasant but often necessary course of action.

While trying and achieving this amicably through voluntary resignation is advisable, the more heavy-handed approach in section 146 may be the only way to go.

However, this is not an option where shares are held 50/50.

To remove a director in such a scenario, you need to rely on agreement between the parties, mediation, the terms of the director’s service agreement and/or your shareholder’s agreement.