Removing a company director and managing conflicts – what should I do?
For most private companies, whether a large corporate entity or a family business, there will likely be a time when a director needs to retire or be removed. This can happen for any number of reasons: a shift in direction, an underperforming director, a change of generations or even just a falling out at board level (the clash of personalities and egos isn’t just limited to TV dramas like Succession, or for this slightly older author, Dynasty). However, what is consistent is that this should always be handled carefully, both legally and practically.
When is it time to go?
For a dynamic business you need more than placeholders on your board, so when a director is no longer contributing and acting in the company’s best interests, it may be time for the board to consider a change.
Directors have significant statutory responsibilities to their company and its shareholders. They make key decisions, attend meetings and take on important legal duties. They must promote the success of the company, avoid conflicts of interest and exercise independent judgement. There is often a significant management or administrative burden in being director, including signing papers, reviewing accounts and attending board meetings. Over time, someone that you previously relied on may no longer be in the best position to perform this function.
Regardless of whether it’s a generational shift or, put simply, the need for more engagement, decisions should always be made with the company’s success at their heart and justified in those terms. It is not enough to argue that a certain face no longer fits (indeed one of the functions of an effective director is to give dissenting views), nor to bring in personal issues in any reasoning unless a working relationship has fundamentally broken down. The law gives short shrift to boards, directors and shareholders who act in ways that are personal, petty and do not consider the interests of the company.
Removing a director legally
If a director does not want to step down voluntarily, then, you will need to check the company’s articles of association (essentially, their rulebook) in case there are grounds in which they can be removed, for example for absence or in case of physical or mental incapacity. By default, a company cannot remove a director simply by way of a board decision, although it is possible to include provision in the articles to that effect.
Where no other grounds for removal exist, and the director does not want to resign, then you would need to rely on the statutory process under the Companies Act to remove the director. This involves the shareholders of a company calling a general meeting, giving 28 ‘clear’ days’ notice (which can be shortened to 14) of this meeting, and passing an ordinary resolution (more than 50%) to remove a director. This process can be difficult to follow and document correctly and is not quick, so it is often helpful to get advice if you need to go down this route. Always ensure the process is documented formally and conducted fairly.
A trouble free transition
For many companies, especially ones built on family ties, relationships can, and should, be longstanding and personal. A successful business is built on trust and commitment. It’s not uncommon for the removal of a director to feel emotional. It is always better to communicate openly and voice concerns in advance, and a voluntary resignation is almost always a better outcome than getting lawyers involved. Consider where possible, face-saving steps, such as offering the departing director board observer status, where they can continue to play a role in the management of the company without the responsibilities (and legal powers) of directors. Indeed, this can be a way of recognising the significant contributions of effective outgoing directors.
Something to consider is whether a director has an employment contract too. Possibly they are a general manager, an accountant or sales representative. If there is an employment contract, then typically the removal of a director does not end their employment. Accordingly, legal procedures must be followed. This may involve extra steps such as giving notice and making redundancy payments. Conversely, if you have grounds to dismiss the director under their employment contract (having followed the appropriate employment steps), check that contract to see if it also requires them to resign as a director.
Informing Companies House, keeping good records and final thoughts
It’s vital that company records are kept up to date, particularly with something as important as a change of director. Once a director has agreed to go, the necessary forms must be filed with Companies House and internal registers must be updated. If this isn’t done, then it will almost certainly create confusion, particularly for suppliers and customers who have previously worked with your departing director, whose goodwill you probably hope to keep.
Overall, it is critical to get the legal steps right but it is just as important to manage the process professionally and with respect. The success of companies depends on its people, its leaders and keeping the business on steady ground. As such, never jump into removing a director but consider every step carefully and clearly.
In the meantime, it is always worth checking your articles of association and other agreements (including ‘shareholder agreements’) to see that they are fit for purpose and to consider whether you need to have stronger provisions for dealing with departing directors.
This advice was given by David Emery, a partner specialising in commercial contracts and corporate governance at Winckworth Sherwood. If you have any questions on this article or would like to discuss anything relating to commercial law, please do contact him.
Neither of Winckworth Sherwood or Forecourt Trader shall be liable for any decision or action taken on the basis of this column. Nothing in this article constitutes legal advice or gives rise to a solicitor/client relationship. Specialist legal advice should be taken in relation to specific circumstances.
