The legal documents you need for your EMI share option scheme
Read our expert step-by-step guide on all the legal documents you need for your EMI scheme, and how to easily create and...
In order to appoint or remove a director (or chairman – they are really just directors too) you’ll need 3 things:
SeedLegals’ new Board product can provide all of the documents you need to appoint and/or remove directors, and our platform will make sure you complete the process legally.
As you use the Board product to do this, our platform will ask “Whose permission is required to make this appointment/termination?”. This is an important question, as different appointments and terminations of directors sometimes need to be made under different sources of authority. (e.g. sometimes it is the founders choosing, sometimes it is the shareholders, sometimes it is a select group of investors).
If you are not sure what the right answer should be, the rest of this article explains which answer you should pick.
If you are a small business (cake shops, dentists, flower sellers) or a startup that has not yet received an equity investment, then 9 times out of 10 your company will be using the ‘model articles of association’. These are the default constitutional rules that the government gives to all newly created companies.
You can check whether your company is using the model articles of association by searching your company name into https://beta.companieshouse.gov.uk/, navigating to ‘filing history’, scrolling down to your first filing and it will state in bold “Model Articles Adopted”.
If you are using the model articles of association (and do not have a shareholders’ agreement in place, if you do, see next section), then those articles state:
17.—(1) Any person who is willing to act as a director, and is permitted by law to do so, may be appointed to be a director—
(a) by ordinary resolution, or
(b) by a decision of the directors.
So, for appointments, you have a choice: appoint by ordinary resolution (meaning 50% of the shareholders’ have to agree), or appoint by decision of the directors (meaning the board must approve the appointment of the director in question). We would recommend appointing the director through a decision of the directors as it means one less form to sign.
For terminations, the model articles of association do not specify how to terminate directors, so this time it is the Companies Act 2006 that sets the rules.
Section 168 of that Act states that directors may be terminated before expiration of his office by ordinary resolution. In other words, unless the director is voluntarily resigning you will have to select that the termination is being done under the authority of the shareholders through ordinary resolution.
If you have agreed a private shareholders’ agreement between the shareholders of your company then there may be rules in that agreement which allow for the appointment/termination of directors to be done by an individual, by the founders, or by a particular group of investors.
You need to read that agreement (if it exists) and see if there are any clauses regarding the appointment or termination of directors. If there are not, then you still need to follow the rules set by the model articles of association (see above).
If you have done a funding round, then it is likely that you will have moved away from the default position of the model articles of association and given the power to appoint/remove directors either entirely to the founders, or shared between the founders and an investor majority or specific (normally lead) investor.
Your new articles of association will no longer talk about appointments or terminations of directors, and all the rules will be found in the shareholders’ agreement that you agreed with your investors.
In that shareholders’ agreement, say you agreed to have a board size of 3 directors. You might have agreed that the founders will keep all of the rights to appoint/remove those 3 directors. If so, choose “the founders”.
You might alternatively have agreed to offer “investor majority consent rights” to your investors, and part of that bundle of rights was the ability to appoint/remove 1 of the 3 directors on your board. If that was the case choose “An investor majority” when dealing with the investor’s chosen director. But otherwise choose “the founders” for the appointment of those founders (or their nominee if they decide to take a backseat in the business).
Or, you might have offered investor consent rights to one individual investor who holds a right to appoint/remove one person on the board. If that was the case then you should choose “A specific investor” from the choices we provide on the platform.
Ultimately, the source of the authority to appoint directors will always be found in either your articles or your shareholders’ agreement. The source of authority for terminating directors may be found in your shareholders’ agreement, but otherwise the default position is that an ordinary resolution is required to terminate a directorship (where that director does not voluntarily resign).
If you have done your last funding round on SeedLegals you can easily check what terms you agreed to by opening up your last round on the platform. Or, alternatively speak with us on intercom and we will assist you to find out what the correct authority is for the appointment or termination you wish to make.