Shareholders in a private company limited by shares (companies with ‘ltd’ at the end of their name), have powers and rights that give them an element of control over the company. It is common knowledge that the directors deal with the day to day management of the company, however the powers of a shareholder can sometimes be understated – for example shareholders can remove a director by agreement.

Sources of shareholder power

There are two sources of the powers of shareholders, that being the company’s articles of association, and the shareholder rights enshrined in law (statutory rights).

Articles of Association

The model articles of association for limited companies (the ‘Articles’) give shareholders a right to vote at general meetings. Decisions are made at these general shareholder meetings by a simple or special majority by way of a show of hands – one shareholder equals one vote. A poll can also be called which is not necessarily one vote per one person. Decisions that need shareholder approval by simple majority would extend to authorising certain transactions between the company itself and a director – this might be a loan to a director or a substantial property transaction – and more.

A decision made by a simple majority (over 50% of votes) is called an ‘ordinary resolution’. There is a different type of resolution called a ‘special resolution’ that is reached by having over 75% of votes. A special resolution is needed when there is a change to the Articles or a fundamental change to the company – for example a change of the company’s name.

Statutory Power to remove directors

The shareholder statutory power to remove a director is fundamental to the fairness of legal governance of companies.

Under s.168 Companies Act 2006 (the Act), a director can be removed by an ordinary resolution at a general meeting. If shareholders object to the way in which a director is carrying out their duties, they can serve a special notice on the company of their intention to remove a director at a subsequent general meeting. There must be a 28 day notice period between the serving of the notice and the general meeting, which gives the company some ‘grace’ to distribute any written representations presented by the director at risk of removal.

Once the meeting has been convened, the director in question has a right to be heard at this meeting. The shareholders then vote on whether to remove the director or not. The vote will be passed by a simple majority.

It is important to reinforce that this right cannot be removed from the shareholders, no matter the agreement between the company and the director – even an executive director who is party to a lucrative service contract can be removed by s.168 but consideration should be given to whether a claim for damages could be made by this director in respect of the termination of their contract.

In reality however, private companies limited by shares often have majority shareholders who are also directors, in which case the director may be able to single handedly block a resolution to remove them. So, in a lot of cases s.168 is more of a fantasy – but not always!

If you would like to find out more, please call 01494 521301 to speak with a member of our Corporate team.