Disputes over the removal of a director are a common trigger for shareholder conflict in private companies. Where the director is also a shareholder, removing them from the board can significantly affect both their influence over the company and the value of their investment.
In some circumstances, the removal of a director may form part of an unfair prejudice claim under section 994 of the Companies Act 2006. This does not mean that removing a director is automatically unlawful. Company law provides mechanisms for shareholders to remove directors, and those mechanisms may be used legitimately.
However, where the removal forms part of conduct that unfairly disadvantages a shareholder, the court may intervene.
Why do disputes about director removal arise in private companies?
In many owner-managed companies, shareholders are also directors who take part in running the business. This arrangement often reflects the original understanding between the parties when the company was formed.
Problems arise when relations between shareholders deteriorate and one group seeks to remove another shareholder from management. This may occur where:
- disagreements develop about the direction of the business
- shareholders lose trust in one another
- the majority seeks greater control over company decisions.
Removing a director may be legally permitted under the Companies Act 2006, but the broader context of the relationship between the shareholders is often crucial in determining whether the removal is unfair.
When can removing a director amount to unfair prejudice?
The removal of a director may contribute to unfair prejudice claims where it undermines the legitimate expectations of a shareholder.
For example, in smaller private companies shareholders often expect to participate in the management of the business. If that expectation formed part of the basis on which the company was established, excluding a shareholder from management may be considered unfair.
Situations that may support an unfair prejudice claim include:
- removing a shareholder-director from the board in order to exclude them from decision making
- combining removal with other conduct that disadvantages the shareholder financially
- using removal as part of a strategy to pressure the shareholder into selling their shares.
The court will consider the overall conduct of the majority rather than focusing solely on the formal act of removal.
How do courts assess legitimate expectations in director removal disputes?
A key issue in these disputes is the concept of legitimate expectations. In many private companies, particularly those resembling partnerships, shareholders may reasonably expect to remain involved in the management of the business.
Courts will examine the circumstances in which the company was formed and how it has operated in practice. Relevant factors may include:
- whether shareholders originally agreed that all would participate in management
- the history of decision-making within the company
- any provisions in shareholders’ agreements relating to management roles.
If the removal of a director defeats an expectation that formed part of the parties’ relationship, the court may consider whether the conduct is unfair.
At the same time, courts recognise that directors can be removed for legitimate reasons. Misconduct, poor performance or genuine commercial concerns may justify removal.
What evidence is important in unfair prejudice claims involving director removal?
Evidence in these disputes often focuses on the history of the shareholder relationship and the reasons for the director’s removal.
Important evidence may include:
- shareholders’ agreements and company articles
- board minutes and shareholder resolutions relating to removal
- correspondence between shareholders
- financial records showing how the removal affected the shareholder’s economic interests.
Witness statements from those involved in the company may also help explain how the business was operated and what expectations existed between the parties.
What remedies can the court order if director removal is unfairly prejudicial?
If the court concludes that the removal forms part of unfairly prejudicial conduct, it may exercise its broad powers under section 996 of the Companies Act 2006.
The most common remedy is a share purchase order, requiring the majority shareholder to buy the minority shareholder’s shares at a fair value. This allows the excluded shareholder to exit the company.
In some cases the court may also make orders regulating the future conduct of the company or requiring certain governance changes.
The remedy chosen will depend on what the court considers fair in the circumstances.
Key takeaway
Removing a director is not automatically unlawful, and shareholders have statutory powers to remove directors from office. However, in private companies where shareholders expected to participate in management, exclusion from the board may form part of unfairly prejudicial conduct.
Where removal is combined with other actions that disadvantage a shareholder, the court may intervene under section 994 of the Companies Act 2006.
Supportive and friendly with partner-led involvement, I would recommend Francis Wilks & Jones to anyone facing a similar situation.
A shareholder who turned to us after discovering that his co-shareholder was profiting well from their business while he was being paid a pittance. We helped him find a way out of the business by selling his shares
