Being in business can be hard, and it is often not an easy road. Sometimes it helps if you share your business ups and downs with a fellow co-founder or director by signing them on with a shareholders agreement. But what happens when that relationship falls apart? Or what if one person isn’t pulling their weight?
Director and shareholder disputes, when pursued through the courts, can be particularly time-consuming, expensive and bitter. After all, you’ve each invested significant time in the company, and each wants your fair share of the business. Where possible, it is best to try and sort things out before the court has to. In this article, we examine the process on how to remove a director or a shareholder.
Can I Remove a Director of a Company?
Firstly, it depends on the type of company. There is a different process for public companies and proprietary limited companies (private) companies. In this article, we will focus on proprietary limited companies.
Under section 135(2) of the Corporations Act 2001 (Cth) (“the Act”), certain “replaceable rules” apply to a company unless the rules have been displaced or modified by the company’s constitution. Replaceable rules apply where no constitution exists. Where a constitution does exist, an examination of the constitution and any shareholders agreement is required.
If the replaceable rules apply then, the replaceable rules provide (under section 203C of the Act) that the members (as opposed to the Board of Directors) of a proprietary company may, by resolution, remove a director from office and appoint another person as a director instead.
Different classes of shares may attach different voting rights at meetings of members. Under the Act, each member has one vote for each share held unless otherwise specified by the company’s constitution.
An ordinary resolution must be passed by a majority (50% or more) of the votes cast by members entitled to vote on the resolution. Ordinary resolutions include:
election of directors; and removal of directors, unless a special procedure is prescribed in the company’s constitution.
But they are still a shareholder of the Company? What can we do to remove them as a shareholder?
Unfortunately, the process isn’t as easy to remove someone as a shareholder. A shareholder cannot be compelled to sell their shares. Regarding share reductions, under s 254H of the Act, a company may convert all or any of its shares into a larger or smaller number of shares, by resolution passed at a general meeting. Also, a company may reduce its share capital in a way that is not authorised by the law but only if the reduction;
- is fair and reasonable,
- does not materially prejudice the company’s ability to pay its creditors, and
- is approved by the shareholders.
On the topic of the acquisition of shares, per s 259A of the Act, a company must not acquire shares in itself except when:
- utilising the share buy-back provisions,
- acquiring an interest in fully-paid shares, in circumstances where no consideration is given for the acquisition, or
- under a court order.
Where possible, it is advisable to try and reach a negotiated outcome with fellow directors and shareholders. This agreement can then be documented. Of course, if this is not possible, then you can explore options for removing them as a director and shareholder.
If you need assistance on your company structure or if you have a dispute with a company member, get in touch with our disputes lawyers.