Summary
- In the UK, a company director can be forced out if shareholders pass an ordinary resolution (more than 50% of votes).
- This is a statutory right under the Companies Act 2006 and cannot be overridden by the company’s constitution.
- Shareholder agreements may discourage removal, but they cannot prevent it—only create liability for breach.
- This guide explains how directors can be removed for business owners in the UK, prepared by LegalVision, a commercial law firm that specialises in advising clients on corporate governance and disputes.
- It provides a practical explanation of voting rights, legal limits and consequences when forcing a director out.
Tips for Businesses
Check shareholder voting power before attempting removal. Follow proper notice and resolution procedures. Review any shareholder agreements for potential consequences. Even if removal is lawful, it may trigger disputes or compensation claims, so seek legal advice before taking action.
A company director can be forced out if shareholders use their voting power to remove them, typically by passing an ordinary resolution with a simple majority. For your business, this creates significant risk in ownership disputes, as losing board control can affect strategy, operations and even your shareholding position, particularly if you are both a director and investor. While shareholder agreements may offer some protection, they cannot prevent removal and may instead create compensation claims. This article explains when a director can be forced out, how the removal process works and the legal risks involved.
Before delving into the specifics, it’s essential to understand the roles involved:
- Director: An individual appointed to manage the company’s affairs and make key business decisions.
- Shareholder: An individual or entity that owns shares in the company and has certain voting rights.
Removal By Ordinary Resolution
Shareholders can remove a director by an ordinary resolution (which requires the affirmative vote of shareholders holding more than 50% of the voting share capital). This is a statutory right contained in the Companies Act 2006, and the company’s articles of association cannot exclude this right of the shareholders. Any attempt to do so is automatically void.
The practical consequence is that if more than half of the shareholders wish to remove a director, they can do so. In doing so, the company effectively removes the directors at the direction of its shareholders.
What Are the Laws Regarding Shareholder Voting?
A shareholder’s voting power depends on how the shareholders vote on the ordinary resolution to remove the director.
Consider the following example. ABC Ltd has the following shareholders with the following percentage of shares (assuming they are all ordinary shares with voting rights attached):
| Shareholder | Percentage of Shares Owned |
| John | 51% |
| Ahmed | 9% |
| Izzy | 20% |
| Carter | 10% |
| Joy | 10% |
If the shareholders vote on the resolution at a general meeting (rather than via written resolution), the default position is that a show of hands decides votes. This means each shareholder has one vote, regardless of the number of shares they own.
Accordingly, if John were a director and three out of the four remaining shareholders wanted to remove John, they could do so by a show of hands.
However, shareholders with more than 10% of the voting shares, or at least 5 shareholders having the right to vote on the resolution, can demand a poll vote. If John demanded a poll vote, he would outvote the remaining shareholders and remain as a director.
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Can Shareholder Agreements Prevent Removal?
Given this, it is worth noting that many companies have shareholder agreements. Many shareholder agreements contain provisions that appear to restrict the ability of the shareholders to remove certain directors. You may, therefore, wonder how these agreements operate if company law refuses to restrict the power of a majority of shareholders from removing a director.
The answer is that shareholders’ agreements are private agreements between the shareholders. That is to say, shareholder agreements are agreements between the shareholders in their private capacity. It does not affect their capacity as shareholders in the company. This is because the company’s articles of association govern this relationship.
However, each shareholder who does so breaches the private shareholders’ agreement. This, in turn, gives the aggrieved director the right to claim damages against the offending shareholders for breach of contract. Nevertheless, a breach of the shareholders’ agreement does not invalidate the shareholders’ vote to remove the director at the company level.
This template helps you document important and major decisions or actions reached in board meetings.
Case Study
Consider the following scenario. ABC Ltd shareholders (as listed above) have also signed a shareholders’ agreement. They are also all directors.
One of the terms of the agreement prohibits any party from voting to remove another party from their office as a director without breaching the agreement. A separate clause states that any breach of this contract shall create a cause of action against the person for damages.
Despite this, a dispute has emerged between Carter and the other shareholders. John and Izzy want to remove Carter. Carter has a five-year contract worth £500,000 in future wages and other benefits with the company. A shareholder resolution is called. John and Izzy vote to remove Carter in a poll. The rest vote no. Despite this, the resolution is passed. By law, the company has removed Carter.
Carter now has a cause of action against John and Izzy. The claim’s value will likely be £500,000 (plus costs). John and Izzy are now personally liable to Carter for this amount if Carter brings a claim and wins.
Further Consideration
There are two other important points to consider when using shareholder agreements.
1. Parties to the Contract
A shareholders’ agreement only binds the parties to that agreement. This means that:
- if certain shareholders vote to remove a director; and
- these shareholders never signed the agreement; then
- they are not in breach of the shareholders’ agreement if they vote to remove one of the directors who is a party to the agreement.
Likewise, a director not a party to the shareholder agreement will not benefit from the shareholders’ agreement.
2. Court Application to Purchase Shares
The law often considers it unfair to force a shareholder who has been deprived of their directorial office to continue being a shareholder. This is because they no longer have the power to manage the company, despite having invested a potentially significant amount of money.
Accordingly, the aggrieved shareholder who has been removed as a director may apply to the court for reinstatement. If the court considers it fair, the remaining shareholders can purchase the shares of the aggrieved director at a competitive price.
Key Takeaways
The law grants shareholders the right to remove directors through a simple majority vote, commonly referred to as an ordinary resolution. The company cannot impair this right. As a result, shareholders can remove any director by passing a resolution. However, a shareholder agreement can make shareholders personally liable to other shareholders if they breach the agreement’s terms. As such, shareholder agreements can protect directors in the event that shareholders remove them from office. Nevertheless, a breach of the shareholders’ agreement does not invalidate any resolution the shareholders lawfully passed.
If you have any questions about the rights of shareholders and directors, LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced corporate lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A company director is an individual who holds a position within a company’s management and has certain rights and obligations outlined in the company’s constitution.
A shareholder is an individual who holds shares in a company.
The removed director may remain a shareholder. However, they may apply to the court for relief, such as requiring other shareholders to buy their shares if it is fair to do so.
No, it does not prevent removal at the company level. However, shareholders who breach the agreement may face personal liability for damages.
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