March 26, 2018

A company’s statutory right to remove a director

Posted in Corporate
Corporate governance

The performance of a director in a company is pivotal to the success of that company. Accordingly, there is legislation in place to protect a company’s right to remove a director should the circumstances demand this course of action. This right is held under section 168 of the Companies Act 2006, which provides that shareholders of a company can remove a director by passing an ordinary resolution (i.e. a majority vote of above 50%) at a general meeting of the company.

The statutory procedure

The statutory procedure to remove a director by ordinary resolution is set out under sections 168 and 169 of the Companies Act 2006; it is crucial to follow this because if there is a divergence from the procedure this will likely render the resolution invalid.

A key aspect of the procedure is to provide special notice. A shareholder must give formal notice to the company of their intention to propose the resolution at least 28 days before the general meeting. Equally, the company should provide notice of the resolution to its shareholders of at least 14 days, or longer, subject to a company’s articles of association. Shareholders should be aware that a written resolution is not sufficient to pass this resolution and it must be passed at a general meeting.

A copy of the intended resolution must be sent to the relevant director concerned. Following this, the director is entitled to make representations to the company in respect of the proposed termination of their office. The director may make written representations and these must be circulated to the shareholders of the company prior to the meeting. The director may also speak at the meeting, regardless of whether they are a shareholder.

The effect of removal

Once the director is removed from the board, this will then terminate the director’s executive role within the company. However, the director will still hold their employment rights under their service contract. A company should therefore be cautious as to whether the removal of the director from office may amount to a wrongful and/or unfair dismissal claim against the company and they will still be entitled to any accrued rights as an employee.

Can a company exclude the right to exercise section 168?

The simple answer to this question is no, the right to exercise section 168 cannot be excluded. In the case of Russell v Northern Bank Development Corp Ltd [1992] 1 WLR 588, the House of Lords held that any provision in a company’s articles to exclude this provision would be an ‘unlawful fetter’ on the company’s statutory rights and thus unenforceable. Therefore any provision in the company’s articles of association or a shareholders’ agreement that seeks to exclude the operation of section 168 is ineffective. Equally, the statutory procedure applies notwithstanding any service contract between the company and the director.

So how can a director overcome this provision?

The company may have a provision in their articles which grants a particular shareholder or shareholders weighted voting rights on a resolution to remove certain directors. In these circumstances, it may mean that a majority cannot be reached when attempting to remove a director from office (Bushell v Faith [1970] AC 1099).

It is also important to note the statutory provision does not affect any other power to remove a director (section 168(5)(b)). Accordingly, the company’s articles can include a further removal process under which it is easier to remove a director.

It is evident that the right to remove a director under s.168 is a useful tool for companies to utilise when necessary. It is however crucial for companies to follow the strict statutory procedure when undertaking this process otherwise their efforts to remove the director may be void. Companies need also be alert to any weighted voting rights which may defeat a proposed resolution to remove a director.

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