There are many reasons why shareholders of a company might require a director to step down from their position on the board. If the director is not prepared to resign from their office voluntarily, section 168 of the Companies Act 2006 (the ‘Act’) allows shareholders holding more than 50% of the voting rights to resolve to remove them at a general meeting.
Failure to follow the procedure prescribed by the Act correctly may lead to challenge by the director for invalid removal. It is therefore essential that shareholders wishing to use the power in section 168 take legal advice to ensure compliance.
HCR’s Corporate team have acted on behalf of shareholders on the successful removal of a number of directors. This experience has given us invaluable insight into the practical hurdles and potential pitfalls. We explore a few tips below.
Calling the meeting
The first step is for the board to call a general meeting. However, if the director being removed is a sole director, or one of two, he or she may seek to frustrate the process by refusing to call the meeting.
In such circumstances, the shareholders can call a general meeting by sending notice to the board of directors, who have 21 days from receipt of the notice to call the meeting. If they fail to do so, the shareholders can call the meeting themselves. Shareholders must factor this 21-day period into the removal timescale.
Of course, the board of directors may well choose to call the general meeting in order to control the time, date and venue, which might be used as a tactic to frustrate the meeting process.
Drafting the documents
In an ideal world, the shareholders’ lawyer would draft the documents to call the general meeting and remove the director. However, if the board calls the meeting, it is likely they will use their own solicitor (or worse, try to do it themselves). It is essential that the documents comply with the requirements of section 168, so there should be dialogue with the directors and their lawyer and, if possible, the documents should be checked by the shareholders’ lawyer before they are circulated.
Choosing the venue
If the directors call the general meeting then it is the directors, rather than the shareholders, who will choose the venue.
What if the directors choose a venue in an inconvenient location? The first port of call is to check the company’s articles of association, which may contain specific requirements around where a general meeting may be held. However, the choice of venue is usually a decision for the directors and the shareholders may not be able to change it.
Appointing a proxy
If any shareholders want to attend the meeting but are unable to, they can appoint a proxy to attend on their behalf. The notice sent out to shareholders inviting them to the general meeting must contain a proxy form. The shareholders can use this form to indicate who they want to act as proxy (which can be a director or another shareholder) and how that proxy must vote. Using a proxy is a useful way of ensuring that a shareholder’s vote is counted at a meeting, even if they cannot attend in person.
Virtual and hybrid general meetings
Another option is to attend the meeting via videoconferencing. If a virtual or hybrid (i.e. part-physical part-virtual) meeting is proposed, it is best practice to ensure that the company’s articles include express provisions permitting it. Shareholders should ensure they are familiar with any provisions in the articles to address technological failure i.e. does the chair have authority to postpone or adjourn the meeting without consent in the event of technological failure? Consider what steps need to be taken to address potential issues, particularly where every vote counts.
Employment and shareholder protection
Before removing a director under section 168, careful thought should be given to the director’s employment status and whether removal from office will give rise to employment law issues. If in doubt, consult an employment lawyer. It is also important to consider whether the removal of a director who is also a shareholder amounts to unfairly prejudicial conduct against that shareholder, giving rise to a remedy under the Companies Act 2006.