Can a Director Be Forced Out?

Disputes may arise between and among the directors and shareholders of a limited company. In some cases, directors and shareholders may wish to remove a particular director from the company. This can often become an acrimonious dispute, especially when the director is a shareholder. Regardless of where you stand in a potential dispute, you may wonder if a company director can be forced out. Unfortunately, the answer is yes, in some cases. This article provides a detailed explanation of the law surrounding this position. 

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):

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.

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. 

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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, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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