REMOVAL OF DIRECTOR

University Degree Business and Administrative studies

REMOVAL OF DIRECTOR

Introduction

The following report aims to investigate a director’s removal from his post. The Companies Act 2006 as well as the relevant case law will be applied.

Removal of the director under Sc 168 CA 2006

Sc 168 CA 2006 provides that the members have the right to remove the director by an ordinary resolution at a meeting. According to Sc 282, ordinary resolution requires simple majority (more than 50%) of the total votes, cast by the members entitled to vote either in person or by proxy. In order to apply Sc 168, a special notice is required (Sc 168 (2)), a copy of which must be sent to the director in question (Sc 169 (1)). Further, Sc 312 (1) requires a special notice to be given at least 28 days before the meeting, at which the resolution is to be dealt with. The meeting to remove the director requires at least 21 days notice.

Sc 169 provides the director with a right to protest against removal, either by speaking on the resolution at the meeting (Sc 169 (2)) or by a written representation (Sc 169 (3)), which company has to acknowledge and send to all members entitled to notice. If received too late (or company defaults), the director could require the representations to be read out at the meeting (Sc 169 (4)).

Due to the weighted voting clause contained in the articles, it might prove difficult to obtain a simple majority of the votes; therefore support from other members would be necessary. If this can be achieved, the director could be removed under Sc 168 CA 2006. If the simple majority cannot be secured, the director will be able to block the resolution. A similar provision of weighted voting was upheld by the House of the Lords as valid in the case Bushell v Faith (1970). Lord Upjohn reasoned that “Parliament has never sought to fetter the right of the company to issues a share with such rights or restrictions as it may think fit”. He further argued that if Parliament had the intention to restrict weighted voting, it would have enacted accordingly (Dignam and Lowry, 2009, pp281-282).

While previous versions of Sc 168 stated explicitly that the company had the right to remove a director, ‘notwithstanding any provision in the company’s articles’ (Sc 303 (1) CA 1985)), Sc 168 does not provide this phrase (French et al., 2009, p438). Thus, some have suggested that this alteration may take away the statutory right (Cockerill and Mendelsohn, 2008). Although the decision in Bushell v Faith (1970) case has been subjected to a great deal of criticism (French et al., 2009, p439), it, nevertheless, demonstrates that weighted voting has been approved by the courts.

Finally, it should also be considered that Sc 168 would not deprive the director in question of claiming for compensation or damages, which may become payable to him due to his termination (Sc 168 (5)).

Alteration of the articles

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Alteration of the articles

As removal of a director under Sc 168 might be difficult due to the weighted voting clause, an alteration of articles could be considered in order to remove the clause in question. Sc 21 (1) provides that the articles may be altered with a special resolution. 75% of the total votes are required to amend the articles by special resolution (Sc 283) whereby a 21 days notice should be usually given. Hence, in order to pass a special resolution, support from other members of the company would be required.

Nonetheless, the director could challenge the alteration of articles as not being ‘bona fide for the benefit of the company as a whole’. In Allen v Gold Reefs of West Africa (1900) the alteration of the articles was upheld as it was carried out ‘bona fide for the benefit of the company as a whole’ as it was intended to recover the large debt due to the company from a deceased member. Also Sidebottom v Kershaw, Leese & Co Ltd (1920) the alteration of the articles was allowed in order to enable a competing shareholder to be bought out as this was ‘bona fide for the benefit of the company as a whole’.

However, in Brown v British Abrasive Wheel Co Ltd (1919) it was held that the proposed alteration was not for the benefit of the company but for benefit of the majority hence an injunction was granted preventing the alteration of the articles.

Therefore to decide would be whether a removal of a director whose girlfriend is employed by an indirect competitor, would be bona fide for the benefit of the company. Graham could argue that as the two companies produce products for different markets, i.e. traditional beers v mass market beers via different distribution channels this would not be in breach with the company’s business ethos.

Exclusion of a director from management

Further, it could be considered as to whether the director in question can be excluded from company’s meetings. However, under Sc 310 the director in question has a right as a member as well as a director to receive a notice of a general meeting. He further has as a shareholder rights to information as well as attendance at the meetings. In Pulbrook v Richmond Consolidated Mining Co (1787) it was held that a director cannot be excluded from management, he therefore could bring an action to enforce the right to act (Sealy and Worthington, 2008, pp246-247).

Sc 994 provides that the director in question could apply to the court by petition on the grounds that the conduct of company’s affairs has been unfairly prejudicial to him. He must have evidence in order to apply this. If the court decides that the petition is justified, it is empowered, under SC 996 (1), to make such order as it thinks fit in the circumstances. It could therefore, for instance, issue an injunction to refrain from continuing the act complained of or regulate the conduct of company’s affairs in the future. The court will take into account the specific circumstances, including the morality of the petitioner when deciding the case.

Issue of new shares

Finally, the issue of new shares could be considered so that the voting power of the director in question would be reduced. In general, the scope of the management powers of directors is prescribed in the articles (Dignam and Lowry, 2009, p266). According to Table A articles of association, 32 (a) the company may by ordinary resolution, thus requiring simple majority, increase its share capital by new shares of such amount as the resolution prescribes. Directors are empowered to do so in order to raise necessary new finance, even if the need may not be critical at time (Rose, 2009, p75).

However, it would be necessary to allot the shares in a way that the voting rights of the director in question are reduced. According to Sc 549 – 551, the directors have a power to allot shares or to grant rights to subscribe for shares either in a private company where there is only one class of shares or if they are authorised to do so by the articles or by resolution. In this case an ordinary resolution would suffice (Sc 551 (8)).

Sc 651 states, however, that existing shareholders have a right of pre-emption; therefore new shares must be offered to them first, which aims to maintain shareholders proportionate holding. Sc 569 (1) gives the right to disapply the pre-emptive rights by a special resolution, requiring 75% of the total votes in the company.

The director in question, however, may challenge the allotment as being made for improper purpose and that the director’s duty to act in within their powers is being breached. Sc 171 (b) states that the directors must only exercise their powers for the purposes for which they are conferred.

In Howard Smith Ltd v Ampol Petroleum (1974) it was held that the directors exercised their power to issue new shares for an improper purpose, primarily to destroy one majority holding and create a new one. The share allotment was therefore set aside. In another case, in Hogg v Cramphorn Ltd (1967), the court came to decision that issue of new shares to prevent a takeover was also for an improper purpose, even though it was bona fide in the interests of the company. Therefore, it is doubtful that John and Giles will be able to issue new shares for this purpose.

Conclusions

To sum up the case, it should be noted that it is usually very difficult to remove the director. Due to the weighted voting clause, even though this is being regarded as widely inappropriate nowadays, removal under Sc 168 would only be possible with a wide support from the other members. Changing the company’s articles might prove to be challenging as well. The company would have to prove that this alteration is ‘bona fide’ for benefit for the company. Considering the previous case law, this would be difficult to achieve. Exclusion from company management could be restrained by Graham by petition to the court and issue of new shares could be challenged to be for an improper purpose. Therefore, it is possible that the removal could not be successful; while this will be perhaps determined by the courts decisions.

REFERENCES

Allen v Gold Reefs of West Africa (1900) in: Shepherd C. (2004) Company Law – 150 leading cases (3rd edn.), pp118-120. London, Old Bailey Press.

Brown v British Abrasive Wheel Co Ltd (1919) in: Shepherd C. (2004) Company Law – 150 leading cases (3rd edn.), p125. London, Old Bailey Press.

Bushell v Faith (1970) in: Shepherd C. (2004) Company Law – 150 leading cases (3rd edn.), pp233-236. London, Old Bailey Press.

Cockerill, A., Mendelsohn, J. (2008) Directors and the missing ‘articles’. Solicitor's Journal, vol. 152-2, 20.

Dignam, A., Lowry, J. (2009) Company Law (5th edn.). Oxford, Oxford University Press.

French, D., Mayson, S., Ryan, C. (2009) Mayson, French & Ryan on Company Law (26th edn.). Oxford, Oxford University Press.

Hogg v Cramphorn Ltd (1967) in: Shepherd C. (2004) Company Law – 150 leading cases (3rd edn.), pp118-120. London, Old Bailey Press.

Howard Smith Ltd v Ampol Petroleum (1974) in: Shepherd C. (2004) Company Law – 150 leading cases (3rd edn.), pp118-120. London, Old Bailey Press.

Pulbrook v Richmond Consolidated Mining Co (1787) in: Sealy, L., Worthington, S. (2008) Cases and Materials in Company Law (8th edn.), pp246-247. Oxford et al., Oxford University Press.

Rose, F. (2009) Company Law (7th edn.). London, Thomson Reuters.

Sealy, L., Worthington, S. (2008) Cases and Materials in Company Law (8th edn.). Oxford et al., Oxford University Press.

Sidebottom v Kershaw, Leese & Co Ltd (1920) in: Shepherd C. (2004) Company Law – 150 leading cases (3rd edn.), pp142-143. London, Old Bailey Press.

Table A articles of association (2007) in: Companies (Tables A to F) (Amendment) Regulations 2007 - Regulation for management of a (private) company limited by shares. Electronically accessed 24th April 2010. http://www.companieshouse.gov.uk/companiesAct/implementations/TableAPrivate.pdf