Lifecycle of a Business: Part 9 - Appointment and Retirement of Directors and Changing of Shareholders

Lifecycle of a Business Part 9 - Changes to stakeholders

BLM's Lifecycle of a Business series captures key elements of a business's growth story - from the highs of formation right through to lows of dissolution. Our experts’ advice and knowledge will help guide you to understand and deal with litigation risks. 

Appointment and Retirement of Directors and Changing of Shareholders

The appointment of directors is governed by the Companies Act 2006, the company’s article of association and the common law. Under section 154 a private company must have at least one director (a natural person) and a public company must have at least two directors. Amy Smith and Oliver Jenkins’ company called, ‘The widget Fixer LLP’, will require a least one director however their article of association may specify a high number. A director of a company does not need to have any qualifications. However, certain categories of persons are not eligible to act as a company director for instance, anyone under the age of 16’. Every private company must have at least one director. If there is more than one director in your private company they will be known as the ‘Board of Directors.’ Directors are responsible for the day-to-day running of the company.

Appointing Directors

When a company is about to be incorporated, the first directors are appointed by giving their details in the application to register a new company. After incorporation, a director can be appointed by the company’s members and certain details will have to be filed to Companies House. The procedure for appointing a new Director will be written in your Company's Articles. This can be done either be passing an ordinary resolution of shareholders in a general meeting (GM) or a board resolution (BR) of existing directors. If you are unsure of the correct procedure for appointing a director after incorporation, it would be appropriate to seek legal advice, this will limit any future disputes and ensure that the appointment is lawfully done (and accordance with Companies House Act).

If a director from your company decides to resign, there are a number of ways that they may leave the company. If the director’s departure is voluntary this will make things easier for the company but on occasion a company may wish the remove a director.  

It is important for a director to check their service agreement (SA), employment contract (EC) or letter of appointment. These documents, if properly drafted, should set out the termination conditions. SA and EC may include post-termination covenants and confidentiality provisions, to prevent any business related data from entering into the public domain or worse, to competitors. If a director breaches post-termination terms then your company should seek legal advice immediately..  

Removing Directors

A director can be removed by the board of directors, shareholders (under the Companies House Act), and disqualified by the court or under the company’s articles. Before removing a director, it will be advisable to seek legal advice first to make sure that the reason for removal is legal, the last thing your company needs is a claim being brought against them. You should be aware that an employed director, like an executive director, may claim unfair dismissal, as they have employment rights, especially those arising from their service or employment contract. There is an obligation to notify the Registrar of Companies when a director is no longer at your company. 

Shareholders Agreements

If a departing director has shares within the company then they should review their shareholders agreement or the company’s article of association to see how to transfer or sell the shares. If an SA is in place then the company should look at the provisions in the agreement relating to directors. In the absence of such a provision a negotiating process should take place and it goes without saying that legal advice should be sought.  

If your company has a legally binding shareholders agreement in place, then the agreement will have provisions on how to issue or transfer shares. Shares in a company can be sold or given away. If the company has restricted the rights to transfer shares via a company articles or shareholders agreement, then transferring may not be an option. Be sure to read the company’s articles and your shareholders agreement. If a shareholder in your company wishes to do either then they should seek legal advice before doing so.  

What now?

Our team of business experts can advise you on this key stage of your business, find out more and request further information to support you and your business.

Read further into our series with part 10: Lifecycle of a Business - Brand protection, social media and defamation.


Disclaimer: This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to clients of BLM. Specialist legal advice should always be sought in any particular case.

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