Posted: Wednesday, 7 September 2016 @ 09:15
Dismissing a director is not as easy as dismissing a normal employee. This blog sets out how to go about firing a fellow company director.
The first thing to appreciate is that most directors in SMEs have three roles – that of a director, an employee and a shareholder – and to get rid of them completely, you will need to remove them from each role.
This is the official role and grants someone the power to make decisions on how a company can be run.
To remove a director from this role depends on what your company’s Articles say. Sometimes, Articles say that the Board of Directors can dismiss a director. If that is the case and the majority of directors agree than someone should go, then they can decide this at a board meeting.
If the Articles do not give the board this power, then the Companies Act gives this power to the Shareholders. Shareholders with more than 50% of the voting power can resolve to remove a director. But there is a special procedure to follow with complicated notice provisions so make sure you check the provisions in the Companies Act first.
In SMEs, most directors are also employees. In this way, they get paid for their work as a director to the company, either by way of salary, or through bonuses, or other such remuneration.
The company can dismiss a director as an employee in the same way as it can dismiss any other employee. But, unless the Board of Directors has previously delegated employment matters to a particular director or committee of directors, which is unusual in SMEs, then a majority of the members must vote for the director’s employment to end at a board meeting.
If a director’s employment is terminated, there is always the risk that they could take the company to an employment tribunal but many companies believe this is a risk worth taking.
This is governed by the shareholders’ agreement, if there is one, or by the company’s Articles. Sometimes, there are clauses saying that, if a director ceases to be a director, they must automatically surrender their shares. If so, the shareholders’ agreement or Articles usually set out how their shares are to be valued.
If such clauses are not in a shareholders’ agreement or the Articles, then they cannot be removed as a shareholder.
Once you have considered your power to remove the particular director, you will either have discovered that you have the power to fire them, or that you do not. In both cases, it is worth discussing this with the director.
If you have the power, you can explain to them that you can go through the procedures to remove them but, given that they cannot prevent it, it is worthwhile negotiating an exit.
If you don’t have the power and feel you can no longer work with them, then it is still worth negotiating as no one likes working in an unfriendly environment. You may still be able to agree an exit.
Take legal advice
The above is only a brief outline. We offer advice on how to remove a director in your particular situation and the sooner you take legal advice and agree a strategy, the easier it will be to part company.
Blog by Gary Cousins
Gary has been providing legal advice to shareholders, directors and business owners for over 25 years. Specialising in dispute resolution Gary is based in Birmingham with clients throughout the UK and overseas. View profile
This blog is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free telephone consultation
to discuss your particular circumstances.