In a typical business, the board of directors is responsible for operational decision-making, with the shareholders taking a back seat. Given that a company operates for the benefit of shareholders, this can create tension if the business isn’t moving in a direction the shareholders like.
It follows that one of the key shareholder powers is to appoint and remove directors, both when the company is formed and during its life. In this article, we look at how you appoint and remove directors, who can be a director, and the corporate governance requirements for putting the board in place.
- Who appoints company directors?
- Who can become a director?
- How to make appointments to the board of directors
- How to remove a director
- What documents do you need to appoint a director?
- What are the filing requirements when appointing a director?
- Are there any other rules that need to be followed?
Who appoints company directors?
When a company is formed, the shareholders choose the directors. In a start-up, the directors are often the founders themselves, but as the company grows, the company may need additional directors to fulfil certain roles, such as finance director.
Shareholders normally appoint directors at the company’s Annual General Meeting (AGM) (or an Extraordinary General Meeting if there’s a need for an urgent appointment). The directors can also appoint new directors, but this needs to be confirmed by the shareholders in due course.
You’ll find the rules governing the appointment of directors in the company’s Articles of Association, and not all companies are the same. There may be an upper limit on the number of directors or there may be a restriction on who can be a director.
If you’re appointing a director, you need to look at the Articles and understand how the procedure works.
Who can become a director?
Only certain individuals (or companies) can become and remain directors:
The minimum age that someone can become a director is 16, and there’s no maximum age.
While companies must have at least one individual on the board, a company or a Limited Liability Partnership (LLP) can also be a director of another company.
Undischarged bankrupts, and certain people involved in ongoing bankruptcy or insolvency proceedings can’t become directors. In addition, if you’ve been a director of a company that has gone into insolvent liquidation you can’t be a director of a company with a similar name within twelve months of those proceedings.
In some cases, a court issue an order preventing someone from becoming a company director or being involved in its management. Here are some reasons why a person may be disqualified:
- They are convicted of an offence in connection with the management of a company or its property, including in connection with a company’s winding-up,
- Where they’ve failed to make necessary filings at Companies House or pay taxes
- Where they are convicted of certain foreign offences in connection with the management of a company
- Where they’ve been a director of an insolvent company and their conduct at that time makes them unfit to be a director, or if they’ve been investigated in connection with their management of a company
The statutory auditor of a company can’t also be a director.
Special rules for public and private companies
A private limited company must have at least one director, and a public company must have at least two directors. While the law doesn’t dictate the maximum number of directors on a board, the Articles may.
How to make appointments to the board of directors
When a company is formed, the first directors are appointed and registered at Companies House. After that, the appointment of directors will normally be made by the shareholders or the board.
If there’s a vacancy, for example, if a director resigns or is removed, the board can usually make an appointment to fill the vacancy, rather than waiting for the shareholders to make an appointment, although that person will only hold office until the next AGM.
The first step for someone to become a director is that they consent to act as such. They do this on a form that’s sent to Companies House.
This is the usual procedure for making a new director appointment:
- The existing board meets to discuss the appointment and decides what kind of person they need. Unless they have someone in mind, they’ll start a recruitment process
- The board will decide the terms and conditions of the director’s appointment, their compensation package and any incentives such as EMI share schemes that will be offered. If the contract contains more than a two-year notice period to be given to the director, then the shareholders must approve it
- The board picks the successful candidate
- The directors hold a board meeting to formally make the appointment, or call a general meeting of the shareholders to approve the appointment
- The company sends Companies House a copy of the director’s written consent to be a director, and provides details of the date of the director’s appointment, their full and previous names, date of birth, occupation, nationality, residential address and address for service of notices. This information is included in Forms AP01 or AP02 (if the director is a company), and must be sent to Companies House within 14 days of the appointment, or you can do this online
- The directors or the company secretary (if the company has one) updates the company registers
Before appointing a director, make sure you read the Articles and stick to the process described. Normally, the board or the shareholders by an ordinary resolution (a majority in favour) decide the appointment. The Articles may contain provisions that require more than 51% of shareholders to agree to the appointment.
How to remove a director
A shareholder who wants to remove a director must file a special notice at the company’s registered office before a general meeting is held. The director will have the right to address the meeting and make written representations to it. If the directors fail to call a meeting, then any shareholder who has more than 10% of the company’s shares can request an extraordinary general meeting.
A director can be removed at the shareholders’ meeting if a majority of those holding ordinary voting rights agree. This right of shareholders to remove a director cannot be taken away from them. If a director is also an employee, they may be able to claim damages against the company for unfair dismissal.
One-third of directors will normally leave office at each AGM by rotation. They are then subject to re-election by the shareholders, who can choose not to re-appoint them.
What documents do you need to appoint a director?
A director will normally be an employee as well as a company director (unless they’re a non-executive director). As such, you need to issue them with a contract of employment, sometimes known as a service agreement. If they’re a non-executive director, they’re appointed with a letter of appointment.
What are the filing requirements when appointing a director?
A company must keep a register of directors containing the directors’ personal details, and registers must be open to inspection by the public. You must tell Companies House where the registers are kept.
Here are the details you need to include for the registers and for filing:
- Company name and registration number
- Date of appointment
- Full name of director and any former names
- Date of birth
- Residential address
- Address for service of documents
Are there any other rules that need to be followed?
If you want to remove a director, you should check the company’s articles to see what procedure to follow. This may be by board decision, or by shareholder resolution. You should also check the terms of the director’s contract, and make sure that you carry out the correct dismissal process.