Company transactions for SMEs: How To Remove A Director/Shareholder

In most SMEs the directors and shareholders are the same persons.  Removing one of them can be difficult and there are several ways of doing this.  A tactical approach is usually needed.

LEGAL POSITION OF DIRECTORS

• Directors usually have different legal roles as a director, employee and shareholder.
• Check the Articles to see if they say a director can be removed by the Board of Directors.  A director can also be removed at a meeting of shareholders. 28 days’ notice to call a meeting must be given and the director will be given the opportunity to put their objections in writing and attend the meeting to put forward their point of view.To remove a director, more than 50% of votes are needed. This obviously causes real problems in companies where there are just two shareholders each with 50% of the voting power.Check is to see whether the Chairman has a casting vote at a shareholders’ meeting. Article 50 of the old Table A (for companies formed before 1st October 2007) says that a Chairman has a casting vote if there is deadlock.
• The company could seek to remove a director who is in breach of their director’s duties. If so, this might mean the company could make a claim against the director for him to pay back money to the company.

EMPLOYEE RIGHTS

• If a director is also an employee (eg they have a service agreement or are paid under PAYE), then they will be dismissed. This can be done by the Board of Directors. In companies where there are only two directors, the board will not be able to dismiss one of them.Beware that a director who has been dismissed could also have a claim for unfair dismissal if unfair procedures are followed.It is safest to have a formal settlement agreement drawn up to prevent the director from going to a tribunal.

SHAREHOLDERS

• Unless the company has a ‘Buy-Back’ clause in a shareholders’ agreement or in the Articles, removal as a director and dismissal as an employee will not stop them continuing to be a shareholder.
• The company should try to reach agreement to buy out the shares. Shares will usually be valued by an accountant.
  If agreement cannot be reached, a minority shareholder can apply to the court claiming ‘unfairly prejudice’. The court will usually order that the leaving director’s shares be sold for value.If the company consists of two equal shareholders, then the leaving director could apply to the court to wind up the company.

Our team of expert commercial solicitors will be pleased to advise. Please contact Alan Zeffertt if you would like assistance:

E: alan.zeffertt@anthonygold.co.uk

T: 020 7940 3950

*Disclaimer: The information on the Anthony Gold website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. It is provided without any representations or warranties, express or implied.*