It is often the case that the shareholders also have a role in the management of the business, and will often be directors. Therefore, one of the parties may try to remove another party as director to try to gain an advantage in the dispute, and perhaps to seek an immediate redress of the problems that they perceive the other party is causing within the business.
Removing a director in the business is not always easy. It will depend on factors such as the articles of association, and whether there is a shareholders’ agreement (this may provide for contractual rights to be on the Board, from which further considerations may arise when devising a strategy for the potential removal of a director).
If, having analysed the company’s governing documentation (and shareholders agreement if any) there can be procedural steps taken to remove the director, it may even be a relatively straightforward process. This scenario would involve the directors calling a general meeting, at which the majority shareholders will pass an ordinary resolution approving the director’s removal. The director concerned must be given special notice of the general meeting and given an opportunity to make representations either in person or in writing. All of this is subject to variation which could arise from the governing documentation, and it is essential that the correct steps are taken to avoid the outgoing director later making a claim related to breach of that process.
It is also important to recognise that going through this process only removes him/her from the office of director. If they are also an employee of the business, a separate process will need to be undertaken to terminate their employment. It is important that this is done properly to avoid him/her being able to claim unfair dismissal.
Although removed as a director from the business, the individual will remain as a shareholder and still potentially have voting rights and be entitled to dividends, so the next step is to remove them as a shareholder.
It is not unusual for other directors in a business to remove a director. However, if that director also has shares in the company, then they may later claim that due to the size of the business and their involvement they had a legitimate expectation that they would be involved in the management. This could therefore give the outgoing director a cause of action for unfair prejudice and he may petition the court for relief.
We understand this area of law acting for business owners that are remaining and being removed from the Board, and so we can advise on the steps to be taken to both advance a claim and protect against such claims in this situation. Visit www.willans.co.uk to find out more.