Appointing a director
When a company dispute occurs, what are the options for appointing a new director?
We have previously written about the removal of directors by ordinary resolution. A less talked about topic, but arguably of equal importance when it comes to company disputes, is the appointment of directors and how this can be done.
Outside the context of a dispute or a deadlocked board, director appointments are typically uncontentious and the processes to do so are straightforward. However, the situation can be less clear where there is the context of an underlying dispute between directors and/or shareholders, and the ability to appoint a new director by either shareholders or directors can be a powerful tool to break any deadlock in a company.
The role of the board and shareholders in decision-making
Generally speaking, both the Model Articles (Article 3) and Regulation 70 of Table A (applicable to some older companies incorporated before the Companies Act 2006 took effect) provide that the business of a company shall be managed by the directors, subject to the provisions of the Companies Act and/or the Articles (if modified).
So in other words, a typical company is run by the board and the shareholders only have a limited say. The shareholders’ ‘reserve power’ (found in the Model Articles and often included in bespoke articles of association) permit the shareholders to either require the directors to take a certain decision, or refrain from taking a certain decision. This requires a special resolution of the shareholders (a majority of not less than 75% of the votes). It follows that shareholders’ powers to influence the board lies in the ability to change its make-up.
Additionally, there are certain decisions which the board cannot take themselves, and for which shareholder approval is needed; the most important decisions reserved to shareholders require a special resolution, with less important decisions requiring an ordinary resolution (needing a majority of at least 50% of the votes).
In our experience, it can be strategically preferable to gain control of the board by appointing additional directors rather than removing existing directors depending on the circumstances. This article will explore some of the ways that additional directors can be appointed.
How many directors can or must a company have?
Under section 154 of the Companies Act 2006 (CA), a private company must have at least one director. At least one director must be a natural person (i.e. an individual human being, not a company). This requirement is met if the office of director is held by a natural person as a corporation sole or otherwise by virtue of an office. Changes to the law to require all directors to be natural persons have not yet come into force, with an implementation date yet to be confirmed by the government.
Articles of association and minimum director requirements
In addition, the company's articles of association may specify a minimum number of directors. For example, regulation 64 of Table A provides that, unless otherwise determined by ordinary resolution, the number of directors (other than alternate directors) shall not be less than two. The model articles do not specify any minimum.
We have found that issues can arise when a company only has one director (who is also a shareholder) and the other non-director shareholders do not agree with the way the company is being run, leading to a dispute. Allegations of unfairly prejudicial conduct by the non-director shareholder can ensue, but in reality a non-director shareholder has limited rights to company information and decision making powers unless there is a shareholders’ agreement in place that specifies otherwise. In those circumstances, the non-director shareholders may consider what rights they have, including to appoint new directors (e.g. themselves) to the board in order to be able to influence, or block, decisions in their favour and to protect their position as shareholders.
Relatedly, in some circumstances where a company has one director and has adopted the Model Articles, there is a question over the ability of the director to take meaningful decisions until new directors are appointed, and this is an area of deliberation amongst lawyers which has been considered by the court recently.
What is the procedure for appointment of directors
The CA is largely silent on the procedure for appointing directors after incorporation. The appointment of directors will usually be covered by the company's articles (or possibly a shareholders’ agreement) which may provide for appointment by the board, or by the shareholders via a written resolution or at a general meeting. In any case, the new director must have consented to act as a director and must be eligible to be able to act as a director.
For example, the board of directors will usually have power to appoint a director to fill a vacancy and to appoint an additional director. A company’s articles might also grant an explicit power for directors to be appointed at a general meeting of the company. In this case, the strict procedure as set out in the articles must be followed.
In the absence of any provision in the articles (and unless restricted by the articles), the directors (exercising the powers of the company generally) may appoint directors. The shareholders also have the power to appoint directors by ordinary resolution at a general meeting pursuant to underlying common law. Clear or unmistakable implication is required to restrict the shareholders’ inherent power. This is different to a shareholder’s right to remove a director, which cannot be restricted by a company’s articles.
How the shareholders can call a general meeting
As a first step, the non-director shareholders could ask the board (informally) to call a general meeting. If there is a dispute and the board will not call a general meeting, the CA (section 303 – 304) allows a minority shareholder to require the directors to call a general meeting of the shareholders.
Under s303 of the CA, the directors of the company are required to call a general meeting if they receive a request to do so from members representing at least 5% of the total voting rights of all members having a right to vote at the general meeting. These provisions override anything to the contrary in a company’s articles of association.
Requisitioning a general meeting requires a specified procedure to be followed and early advice should be sought to ensure compliance with that procedure. In summary, provided a request is properly made by a shareholder (which, as a minimum, sets out the general nature of the business to be dealt with at the general meeting), the board must, within 21 days, call a general meeting for a date not more than 28 days after the date of the notice by the shareholder convening a meeting.
If the director fails to call the meeting within the requisite time period, then the members who requested it may themselves call the meeting, for a date not more than three months after the directors were required to call it (i.e. 21 days after the request was made - s305 CA).
If all of the above notice periods are extended to their limit, the meeting may not be held until over two months after the shareholders serve their initial notice. Therefore, it is not a quick process, particularly if the company structure is complex with multiple subsidiaries.
For an ordinary resolution to be passed at the meeting to appoint a director, or directors, such resolution must be supported by more than 50% of the shareholders who are eligible to vote at the meeting.
Potential limitations
In the same way as for the removal of directors, as well as ensuring compliance with the relevant procedure, complications can arise where there are weighted voting rights in the company’s constitution which could affect the voting and the ability for the resolution to be passed. There may also be specific provisions in a shareholders’ agreement that need to be borne in mind.
Related formalities and registration requirements
Once a new director is appointed the company must notify Companies House within 14 days of this appointment (by the completion and submission of form AP01) pursuant to section 167 of the CA and the company’s statutory register of directors should be updated.
New identity verification rules for directors
New rules coming into force in 2025 will require all directors of companies incorporated in England and Wales (and overseas companies who are required to register particulars with Companies House) – whether existing or proposed new directors – to have their identify verified. Directors who fail to have their identity verified within the requisite timeframe will be prohibited from acting as a director (unless exempt). It is anticipated that the new requirements will take effect from Autumn 2025 but the exact dates are yet to be confirmed.
Conclusion
We recommend you seek legal advice to ensure that any procedure for appointing directors is followed. Even prior to that, it is important for all companies to consider their constitutional documents and what they provide for in terms of appointment and removal of directors, to ensure there is clarity.
Whilst ideally this should be done upon incorporation, amendments to a company’s articles can be done at any time, or a shareholders’ agreement put in place, again provided the correct procedures are followed for the implementation of these documents (including, crucially, obtaining the approval of relevant shareholders).
