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Removal of a Director of a Private Limited Company - Part 1 of 4

All directors are subject to a duty to act in the best interests of their company and to promote the success of the company for the benefit of its shareholders.

Often, and for various reasons, a director may not meet the standards required of a competent director to the extent that he or she is not appropriately managing the company or is acting at odds with the strategies adopted by the majority of the company's management. In such circumstances, there may be no other option for the company but to remove such a director.

The removal of a director is a delicate issue for any company and care must be taken when removing a director from office to avoid any legal claims which have the potential to arise or defects in the process rendering it ineffectual.

This article is the first of a short series of four parts discussing how a director can be removed effectively by tackling the procedural concerns associated with these steps. We strongly recommend that, if you are considering the removal of a director, you consider each part of this series as the themes of the parts are linked. Discussion will begin by considering the removal of a director from his/her position on the company board, before exploring the practical considerations of removing a director, particularly where he or she has another significant role within the company. Additional articles in this series will therefore focus on the removal of a director who is also a shareholder, employee and creditor or debtor and the potential threat of statutory claims.

As with any matter affecting the company, the first place to start is its Articles of Association (AoA). In most companies, the power to remove a director is often granted to the board of directors or to a majority of the shareholders under the company's AoA. Typically, such provisions will allow for the removal of a director subject to the board or a majority of the shareholders serving written notice on the director in question.

Some companies may have bespoke AoA dealing with this point, however, if the AoA are silent it will be important to consider whether the Model Articles prescribed in the Companies Act 2006 ("the Act") are incorporated or the Table A articles for any companies incorporated under the Companies Act 1985.

Companies should also consider whether a shareholders' agreement has been signed. If so, this agreement should also be consulted prior to removing a director as this may also include relevant provisions.

If a company does not have provision in its AoA for removing a director then the statutory procedure contained within sections 168 and 169 of the Act will apply. This allows the shareholders of the company to remove a director by ordinary resolution and following a strict procedure laid out in the Act. An ordinary resolution requires a simple majority of over 50% of shareholders voting.

The first step in this process begins with the shareholders proposing a resolution to remove a director. This must be done by giving special notice to the director concerned and the other shareholders of the company at least 28 days before the general meeting at which the shareholders will vote on the ordinary resolution.

Following this, notice of a general meeting must then be issued to all shareholders and the relevant director. In response to this, the director has the opportunity to make written representations in response to the proposal to remove him and, if practicable, the company must circulate those representations to the shareholders prior to the meeting.

At the meeting, the director in question is entitled to address the shareholders and put across his position. He may also request that any written representations that were made prior to the meeting are read out. The shareholders will then vote on whether the director should be removed and such a vote will be passed by achieving a simple majority.

It should be noted that this statutory procedure can be used to remove a director even if the company's AoA contain its own provisions which try to exclude them. Any provision within the company's AoA which is contrary to the statutory provision would be considered to be fettering the company's statutory powers and would be unlawful and unenforceable. However, with that being said, although a provision in the AoA which restricts the statutory powers would be invalid, a private agreement between individual shareholders as to the exercise of their voting rights which did not attempt to bind the company or any other shareholders could be lawful.

There are technical rules behind each of these steps so advice should be sought in this regard to ensure that any removal procedure is competent and followed appropriately to remove a director validly and lawfully within the scope of the Act.

The removal of a director from any company can be a complicated and lengthy process. Aside from these practical steps that must be followed, there are many additional considerations connected to this process which companies must consider to avoid potential liability. Part 2 of this series, to follow, will explore these considerations.

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