Disputes at board level can quickly become disruptive, particularly when a director is no longer acting in the company’s best interests. Matters become even more complex when that individual is also a shareholder. Business owners and directors often ask: how do you remove a director who is also a shareholder, and what risks are involved?
This article explains the legal framework in the UK, the practical challenges of removing a director who holds shares, and the options available for removing a director from a business to help reduce the potential for costly disputes.
Why Removing a Director-Shareholder Is More Complicated
A director who is also a shareholder occupies two separate legal roles:
- As a director, they owe statutory and fiduciary duties to the company.
- As a shareholder, they have property rights attached to their shares.
Removing someone from their directorship does not automatically remove their shareholding. This dual status is the reason these situations often escalate into serious disputes if not handled carefully.
Understanding the distinction between removing the director role and dealing with the shares is essential before any steps are taken.
The Legal Framework for Director Removal in the UK
The starting point for the removal of a director is the Companies Act 2006.
Removal Under Section 168 Companies Act 2006
Under Section 168, shareholders may remove a director by passing an ordinary resolution (a simple majority of votes cast), regardless of what the company’s articles say.
However, the process is strict:
- Special notice must be given to the company at least 28 clear days before the meeting.
- The director has the right to:
- Make written representations to shareholders.
- Speak at the meeting before the vote.
- The company must circulate the director’s representations (unless a court orders otherwise).
Failing to follow this process can invalidate the removal and expose the company to claims.
Can the Articles or Shareholders’ Agreement Block Removal?
Although section 168 is powerful, it is not always decisive in practice.
Bushell v Faith Clauses
Some companies include weighted voting provisions (commonly known as Bushell v Faith clauses) in their articles. These give a director-shareholder enhanced voting rights on a resolution to remove them.
In practice, this can make it impossible to achieve the majority needed, even if other shareholders are aligned.
Shareholders’ Agreements
A shareholders’ agreement may also restrict or condition the removal of a director, for example by:
- Requiring unanimous consent.
- Linking directorship to share ownership.
- Triggering dispute resolution mechanisms.
Before attempting to remove a director from the company, the articles and any shareholders’ agreement must be reviewed carefully.
Removing a Director vs Removing a Shareholder
A key point that often causes confusion is the fact that removing someone as a director does not remove them as a shareholder.
Once removed from office, the individual may still:
- Retain voting rights.
- Receive dividends.
- Block future decisions.
- Bring shareholder claims.
This is why removing a director from the company is often only one part of a broader strategy.
What Options Exist for Dealing With the Shareholding?
If the goal is a clean break, the shareholding must usually be addressed separately. Common options include:
1. Share Purchase or Negotiated Exit
The most commercially sensible route is often a negotiated buyout, documented through a share purchase agreement or settlement arrangement.
2. Compulsory Transfer Provisions
Some articles or shareholders’ agreements include “bad leaver” or compulsory transfer clauses, which can be triggered on removal as a director. These must be exercised strictly in accordance with their terms.
3. Company Share Buyback
In some circumstances, the company may buy back the shares, subject to statutory procedure and funding requirements.
4. Drag-Along or Tag-Along Rights
In group exit scenarios, drag-along rights may be relevant, although they rarely solve director disputes on their own.
Each option carries tax, valuation and legal risks that require careful advice.
Risks of Unfair Prejudice Claims
One of the most significant risks when removing a director-shareholder is an unfair prejudice claim under section 994 of the Companies Act 2006.
These claims commonly arise where:
- The director is excluded from management without justification.
- Removal is oppressive, punitive or procedurally unfair.
- Legitimate expectations (for example, continued involvement) are breached.
Unfair prejudice claims can result in:
- Court-ordered share buyouts.
- Damages.
- Costly, prolonged litigation.
This risk is particularly high in small or quasi-partnership companies.
When Removal May Still Be Justified
Despite the risks, removal may be necessary and justified where a director:
- Has breached fiduciary duties.
- Is acting in conflict with the company’s interests.
- Is causing deadlock or operational paralysis.
- Has lost the trust and confidence of other shareholders.
In these cases, process, evidence and proportionality are critical. A poorly handled removal can be more damaging than the underlying conduct.
Alternative Approaches to Consider
Because of the complexity, many disputes are resolved without formal removal.
Alternatives include:
- Negotiated exits with agreed valuation mechanisms.
- Compromise agreements covering directorship, shares and future claims.
- Corporate restructuring to dilute influence.
- Mediation or structured negotiation.
These approaches often preserve value and reduce litigation risk.
Practical Steps Before Taking Action
If you are asking how to remove a director who is also a shareholder, it is sensible to pause and assess:
- What do the articles and shareholders’ agreement say?
- Do voting rights allow removal in practice?
- Is the objective to remove the director role, the shareholding, or both?
- What is the risk of an unfair prejudice claim?
- Is a negotiated solution possible?
Early legal advice can prevent irreversible mistakes.
How Ignition Law Can Help
Removing a director who is also a shareholder is one of the most sensitive areas of company law. It sits at the intersection of governance, shareholder rights and dispute resolution.
Ignition Law advises business owners, directors and shareholders on:
- Lawful removal of a director under the Companies Act.
- Managing disputes involving director-shareholders.
- Structuring exits, buyouts and settlements.
- Reducing the risk of unfair prejudice claims.
Our approach is practical, commercially focused and tailored to the realities of running a business.
Final Thoughts
So, how do you remove a director who is also a shareholder? The answer is rarely straightforward. While the law provides mechanisms for removing a director, the shareholding and dispute risks mean that strategy and process matter just as much as legal entitlement.
If you are considering removing a director from the company, or are already in dispute with a director-shareholder, Ignition Law can help you assess your options and take the right steps with confidence.
Contact our team to discuss your situation and receive clear, expert guidance tailored to your business.
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