The ability to remove a director from his office is the ultimate sanction shareholders have against a director. Under s.168(1) CA 2006, a company (i.e. the shareholders) may by ordinary resolution remove a director before the expiration of his period of office, notwithstanding anything in any agreement between the company and that director.
Under s.168(2) CA 2006 special notice is required of a resolution to remove a director.
What is special notice?
For simplicity, I will refer to a resolution to remove a director under s.168(1) CA 2006 as a “removal resolution”.
Shareholders proposing a removal resolution must give notice of that proposed removal resolution to the company (i.e. to the board of directors) at least 28 clear days before the general meeting at which the removal resolution will be voted on by shareholders (ss.312(1) and 360(1) and (2) CA 2006).
The board usually decides what matters will be considered at a general meeting. Therefore, when the board receives notice of the proposed removal resolution, two courses of action are open to it:
Place the removal resolution on the agenda
The board may decide to place the removal resolution on the agenda of a general meeting, in which case, when the general meeting is held, shareholders will vote on that removal resolution.
If the board does decide to place the removal resolution on the agenda of a general meeting, it should give the shareholders notice of that removal resolution at the same time and in the same manner as it gives notice of the general meeting (s.312(2) CA 2006). This means that the board will need to give shareholders at least 14 clear days’ notice of the removal resolution under ss.307(1) and 360(1) and (2) CA 2006 (see Fenning v Fenning Environmental Products Ltd (1981), which was an authority for the equivalent rule under CA 1985).
If that is not practical (e.g. because notice of the general meeting has already been sent out), notice of the removal resolution may be given either by advertisement in a newspaper or any other mode allowed by the company’s articles of association at least 14 clear days before the general meeting (ss.312(3) and 360(1) and (2) CA 2006).
It might seem strange that the board needs to give shareholders notice of the removal resolution when it was the shareholders who sent the removal resolution to the board in the first place.
The reason for this lies in understanding that only some of the shareholders will have sent the proposed removal resolution to the board. We shall call these shareholders the “unhappy shareholders”. The company’s other shareholders may have no knowledge of the fact that the unhappy shareholders have proposed a removal resolution.
Therefore, if the board decides to put the removal resolution on the agenda of a general meeting, it needs to give notice to all shareholders (including the unhappy shareholders) of the fact that a general meeting will be held and that, at that general meeting, all shareholders will have the opportunity to vote on a removal resolution.
Decide not to place the removal resolution on the agenda
Alternatively, the board may decide not to place the removal resolution on the agenda of a general meeting. Directors are not bound to place the removal resolution on the agenda for consideration at a forthcoming general meeting (Pedley v Inland Waterways Association Ltd (1977), a CA 1985 authority). In practice, this creates a problem for shareholders as directors may choose simply to ignore the proposed removal resolution.
If the removal resolution is not placed on the agenda, it will not be considered at the general meeting. In this case, the shareholders may need to force the directors to call a general meeting in accordance with s.303 CA 2006.
Shareholders’ power to require calling of general meeting
As we have seen above, it is sometimes the case that the board of directors will try to frustrate an attempt to remove a director by refusing to call a general meeting. In this situation, the unhappy shareholders may have the ability to require the directors to call a general meeting and, if the directors refuse to do this, the unhappy shareholders may be able to call the general meeting themselves.
How do shareholders require the directors to call a general meeting?
Under s.303(1) CA 2006, shareholders together holding not less than 5% of the paid up voting share capital of the company can serve a request on the company i.e. the board. The request will require the board to call a general meeting (a “s.303 request”). The threshold of 5% is found in s.303(2) CA
2006.
A s.303 request must state the general nature of the business which the shareholders wish to be dealt with at the general meeting, and may include the text of the resolution they want proposed at the meeting (here, to consider a removal resolution pursuant to s.168 CA 2006).
What are directors’ obligations on receipt of a s.303 request?
Under s.304(1) CA 2006, when the directors receive a s.303 request, they must call the general meeting:
- within 21 days from the date on which they become subject to the s.303 request to call the general meeting; and
- to be held on a date not more than 28 days after the date of the notice convening the general meeting.
What happens if the directors fail to call the general meeting?
If the directors fail to call a general meeting under s.304(1) CA 2006, all of the shareholders who submitted the s.303 request or any of them representing more than one half of the voting rights of those who submitted that s.303 request, can call a general meeting themselves pursuant to s.305 CA 2006.
If the shareholders call the general meeting themselves then that general meeting must be called on no fewer than 14 clear days notice (s.305(4) CA 2006) and held within 3 months of the date that the directors received the s.303 request (s.305(3)).
Under s.305(6) CA 2006, if the shareholders are forced to call the general meeting themselves, they can recover their reasonable expenses for doing so from the company.
Conclusion
In order for the unhappy shareholders to ensure the resolution to remove a director is heard as soon as possible, they will submit a s.303 request requiring the directors to call a general meeting at the same time as sending their s.312 CA 2006 special notice to the board.
By sending these two notices to the board at the same time, shareholders will comply with s.312 CA 2006 (which is a stand alone requirement that needs to be satisfied) and also ensure that:
- the directors either call a general meeting with an agenda which includes the resolution to remove the director under s.303 CA 2006; or
- the shareholders can step in and call the general meeting under s.305 CA 2006 themselves.
Director’s rights to protest removal
If a company receives notice that one or more members intends to propose a removal resolution, the company must immediately send a copy of the notice to the director concerned (s.169(1) CA 2006).
The director then has the right to make representations in writing provided those representations are of a reasonable length (s.169(3) CA 2006). These representations will, for example, set out the reasons why the director feels he should not be removed. These representations should, unless they are received too late for the company to do so, be circulated to the members of the company. If the representations are not circulated, they should be read out at the general meeting (s.169(4) CA 2006).
In any event, the director concerned has a right to be heard i.e. to speak in his defence at the general meeting, whether or not he is a shareholder (s.169(2) CA 2006).
Will the director be entitled to any compensation?
Section 168(5) CA 2006 provides that removal under s.168 CA 2006 does not deprive a person of any right they may have to compensation or damages payable by reason of the termination of any appointment. This means that if the director’s service contract (i.e. his employment contract) is breached by reason of his removal from the office of director under s.168 CA 2006, then he may be entitled to damages or compensation for breach of that service contract.
Payments under the terms of a director’s service contract need to be distinguished from any additional payment for loss of office which will require shareholder approval.
What if the director is also a shareholder?
Always check the articles to see if there is a Bushell v Faith clause.
A Bushell v Faith clause in the articles of association may give a director, who is also a shareholder, weighted voting rights at a general meeting at which a s.168 CA 2006 resolution is proposed. This is likely to mean that shareholders are unable to pass an ordinary resolution to remove the director concerned.
This type of clause is often found in the articles of association of smaller companies where the directors have played a key role in setting up the company and have an expectation that they will be able to continue to be involved in the running of the business. Any shareholders’ agreement should also be checked for similar provisions.
The articles should also be checked in order to determine whether there are any transfer provisions which may govern the transfer of the outgoing director’s shareholding in the company. From a practical point of view, if a director is to be removed, the company and the shareholders are unlikely to want him to retain his shareholding, so transfer provisions are usually found in a company’s articles of association and/or in any shareholders’ agreement. These transfer provisions would, for example, require the director to transfer his shares to the other shareholders if he is removed as a director.
Can you use a shareholders’ written resolution to remove a director?
No, the procedure cannot be used – see s.288(2)(a) CA 2006.
Can a director be removed from office by fellow directors?
The answer to this is not unless the articles specifically provide for this. Where the articles expressly provide that a director can be removed by the other directors, this power has been upheld by the courts (see Bersel Manufacturing Co Ltd v Berry [1968] 2 All ER 552). The Model Articles do not provide for this. If the directors were able to remove their fellow directors, this could lead to difficulties in decision making.