Removing a director is not just a legal formality. In many Malaysian companies, especially small and medium-sized enterprises and family businesses, directors are often founders, major shareholders, or key leaders. If the removal is handled poorly, it can cause disputes, disrupt daily operations, lead to expensive legal cases or even destabilise the company.
This guide explains the main legal requirements under the Companies Act 2016 (“Act”), common mistakes to avoid and practical steps to manage the process safely and reduce risks.
The Legal Framework: Section 206 of the Act
For private companies, if the company does not have a constitution or the constitution does not provide a specific process for the removal of directors, the default procedure for removal of directors is governed by Section 206 of the Act.
There are some key procedural requirements to follow under the Act :-
- Special notice: At least 28 days’ written notice of the intention to propose the resolution of removal of a director must be given to the company before the meeting at which it is moved (Section 206(3) read with Section 322). Such notice shall be served on the board of directors too.
- Physical meeting required: For private companies, removal cannot be done via written resolution (Section 297(2)(a)). A general meeting (EGM or AGM) must be convened.
- Ordinary resolution: Passed by simple majority at the meeting (Section 206).
Failure to comply with these requirements, such as providing insufficient notice of intention, bypassing the required meeting, or preparing defective documentation, may render the removal invalid and expose the company to potential legal challenges.
Common Pitfalls
(i) Legal Challenges from Removed Directors
One common reason for a challenge is that the director claims the company did not follow the proper legal procedures required by law when removing them (for example, not giving proper notice or not following the Act requirements) and may seek a court declaration that the removal is invalid. In more urgent situations, the removed director may apply for injunctions or other court orders to stop the company from enforcing the removal or temporarily restore the director’s position.
Such proceedings can be time-consuming, costly and potentially damaging to the company’s reputation, even in cases where the company ultimately prevails.
(ii) Confusing directorship with employment
Another common mistake companies make is assuming that the removal of a director automatically terminates that individual’s employment with the company. In law, a director’s position on the board and their employment relationship with the company are legally distinct. As such, removing an individual as a director does not, by itself, terminate their employment, even where the individual also serves as the CEO, Managing Director, or holds another executive role.
To manage this appropriately, companies should ensure that the termination of employment is undertaken through a separate and compliant process. This includes providing proper notice, establishing valid grounds for termination and complying with applicable employment laws, such as the Employment Act 1955 where relevant, in order to mitigate the risk of claims for wrongful or unfair dismissal.
(iii) Confusing Board Removal with Shareholder Rights
It is important to note that removing a director from the board does not affect their status as a shareholder. Individuals who are also shareholders will continue to retain rights, including access to company information, entitlement to dividends, and the ability to influence decisions through voting.
Without clear boundaries, this situation may give rise to practical challenges, such as interference with governance, delays in key decisions, or excessive requests for company records. Companies should therefore implement appropriate safeguards to clearly define the responsibilities and limits of former directors who remain shareholders. These measures help protect the company’s operations, support smooth decision-making, and reduce the risk of disputes or disruptions arising from former directors.
(iv) Failing to Complete Post-Removal Compliance
An often-overlooked issue is the assumption that a director’s removal is complete once the members’ resolution is passed. In practice, failure to promptly follow up on statutory requirements can give rise to compliance breaches, fines, operational risks, or situations in which the removed director continues to exercise authority. For instance, under Section 58 of the Act, the company must notify the Companies Commission of Malaysia within 14 days of the removal. From a practical perspective, the company should also promptly update all internal records, including the register of directors and where applicable, bank accounts, mandates, and signatory authorities. Taking these steps helps prevent the removed director from retaining unauthorized access or signing authority, thereby reducing operational and legal risks.
Key Takeaway:
Removing a director is one of the most important and sensitive decisions a company may face. While the Act provides clear legal procedures, a successful outcome depends on careful adherence to process, strategic planning, and thoughtful consideration of both the people and business implications.
To handle the process safely, companies should:
- involve experienced corporate lawyers early.
- review the relevant documents such as company constitution, shareholders’ agreement and any employment contracts.
- keep thorough records, follow proper procedures, and ensure fairness.
- complete all post-removal steps carefully.
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This article was written by Jocelyn Lier (Associate) from Donovan & Ho’s corporate practice.
Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. Feel free to contact us if you have any queries.
