When you run a company, there are a number of legal obligations you have to shareholders, directors and employees. It can be difficult enough to remove an employee who is performing poorly, but when it’s a company director who needs removing, the whole process becomes even more complicated. This is, in part, due to the fact that directors can often hold the office of company director, shareholder and employee.
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Sacking a Director? Check the Articles of Association
If you want to sack a company director, the first place to look should be the company’s Articles of Association. When the company was formed, it’s possible that a clause could have been added which says that a director can be removed with the agreement of the Board of Directors. If that clause isn’t included, it may be down to the shareholders, who can remove a director under the Companies Act 2006. The specific process, though, is complicated.
Removal by the shareholders
- The shareholders must give 28 days’ notice of the meeting, and the director should be given the chance to put forward his or her case in writing, as well as attending the meeting.
- This is known as removal by Ordinary resolution. More than 50% of votes are required to remove a director, which means that companies in which there are only two (or even four) shareholders can experience deadlock at this stage.
- To vote at the meeting, a shareholder must be listed in the Register of Members. The Articles of Association may state that a certain number of shareholders have to be present (the default number is two, if not) and could even state that a shareholder’s voting power changes with the size of their shareholding. It’s also possible that the Chairman could hold a casting vote in the case of deadlock — something which is usually effective in companies formed before 1st October 2007.
Sacking a company director – the importance of getting procedure right
Attempting to remove a director without having first ensured that you’re entitled to by law is a serious issue, and the director could raise a grievance against you as a result. Because of this, it’s a good idea to contact a business lawyer with plenty of experience of company disputes who will be able to establish your rights in terms of getting rid of a director and ensure that you stay on the right side of the rules and regulations.
Director as employee
It’s important to note that removing a company director does not automatically terminate their employment. If the director is also an employee of the company, they will have to be dismissed as an employee, too. It’s possible that there might be a case for unfair dismissal if proper procedures are not followed, so great care should be taken here.
Removing a director – the risk of an employment tribunal
Removing a former director as an employee and terminating their employment without good reason could result in the company being called to an employment tribunal, with the distinct possibility of a large financial penalty being put on the company.
The tribunal can order that the person be given their job back, which would mean that a disgruntled former director would still be on the payroll of your company. Needless to say, obtaining professional legal advice is vital before going down this route, as these are all situations which are best avoided.
A settlement agreement should be drawn up between the company and the outgoing director in order to ensure the director does not take the company to an employment tribunal in the future.
Click here to read more about Settlement Agreements
Director as shareholder
Even after you’ve removed the director from their position and potentially even terminated their contract as an employer, the person will likely still remain a shareholder in the company. Unless there’s a buy-back clause in their shareholder agreement or the company’s Articles of Association, they’re perfectly entitled to stay on as a shareholder, as well as the associated dividends and voting rights.
If you wish to buy out the shareholder, a business lawyer will be needed to help value the shares, particularly if it’s a small or medium sized business.
The shareholder does have certain rights, and removing a shareholder without their agreement can be extremely difficult. This is another reason why contacting a specialist business solicitor will help. They’ll be able to advise you as to best practice and ways in which you can remove a person as a director, employee and shareholder without potentially falling foul of the law and finding yourself in front of a court or tribunal.
Director disputes within your business can be expensive, time consuming and cause an atmosphere within the business which can damage it — sometimes irreparably.
Quick, decisive action tends to be best, but this must be done in accordance with the law in order to protect yourself, your business and its employees.
If you want to discuss the possibility of removing a director from your company, call our team of specialist business lawyers today, and we’ll look at your case on an individual basis and advise you as to the best way to go about it.
Click here to read more about shareholder disputes
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