The Companies Act 71 of 2008 (“the Act”) allows a Company’s Board or its shareholders to remove a director depending on particular circumstances within the Company and the make-up of the Board.
THE BOARD
The Board may only remove a director where the Company has at least three directors. If the Company has less than three directors, the Board has no power to remove a director and the matter must be referred to the shareholders or to the Companies Tribunal.
Furthermore, the Act does not specify that a time period and/or notice must be given to a director when the Board intends to vote on removing the director.
Once the Board intends to remove a director, it must provide the director with written reasons and a copy of the contemplated resolution which sets out the reasons for his/her removal and the Board must grant the director reasonable time to respond to the reasons provided for his/her removal. As the Court held in Pretorius v PB Meat (Pty) Ltd [2013] ZAWCHC 89, these reasons must be set out with sufficient specificity to reasonably allow the director to prepare and present a response. However this may not be used by the director in question to unnecessarily delay and bypass Section 71 of the Act, which regulates the removal of directors.
The director can either present his/her response to the Board in person or by way of verbal representations or through a representative. This is to prevent directors from removing each other without good reason or for ulterior reasons and further to ensure that the director has an opportunity to state his/her case. The Board can therefore not consider the director’s defence and/or response prior to the meeting being held for the purpose of the director’s removal.
The Board cannot exercise its power to remove a director unless one of the statutory grounds are present and these grounds and reasons may be contested and challenged by the director. Section 71(5) further gives the Court the power to review the decision of the Board in this regard and the Court may consider various remedies, e.g. interdicting the Board from removing the director, compensation to be paid to the unfairly removed director or reinstatement of the director, or all of the aforementioned remedies.
It is important to note that there is a difference between the power to remove a director that is vested in the shareholders' meeting and the power to remove a director that is vested in the Board. In a shareholders' meeting, the shareholders may remove a director from office for any reason and are not only limited to those grounds specified in Section 69 of the Act, the shareholders can therefore simply vote on the resolution as they deem necessary.
SHAREHOLDERS
Section 71(1) of the Act states that a director may be removed by way of an ordinary resolution (51% of the voting rights, or the percentage stipulated in the Company’s Memorandum of Incorporation) adopted at a meeting of the shareholders by the persons entitled to exercise voting rights in an election of that director. The Act does not require that a director must be provided with the reasons or grounds for his/her removal and grants the shareholders the power to simply remove a director by way of passing an ordinary resolution.
The shareholders, therefore, have the power to pass ordinary and special resolutions on matters provided for in the Act. In particular, the Act and Section 71(1) as mentioned above provides that the shareholders can at any time pass a resolution removing a director from office. This is an absolute and proprietary right that shareholders possess.
A director who no longer has the support of the majority shareholders must accept the removal from office unless he/she can find some legal basis for preventing the shareholders from holding the required meeting in accordance with Section 61(3) of the Act and, thereby, preventing the shareholders from voting on the specific matter and removing the director.
In Steenkamp and Another v Central Energy Fund Soc Ltd and Others (13599/2017) [2017] ZAWCHC 107; 2018 (1) SA 311 (WCC), the Court stated that the shareholders of a Company, acting through a shareholders meetings, have a wider discretion or power to remove directors, and that in the case of the Board electing to remove a director, they would be bound to the requirement that the director had become ineligible in terms of Section 69 of the Act.
There are many conflicting opinions in respect of the requirement for reasons to be given to a director where his or her removal is contemplated by the shareholders as opposed to the Board. In Johannes Jacobs Pretorius & 1 Other v Steven Edward Timcke & 3 Others, case number 15479/2014 (Unreported), the Court confirmed the distinction between the removal of a director by the Board and by way of a shareholders’ meeting. However, the Court adopted the position that shareholders should furnish reasons for their intent to remove the director.
This position has been questioned in the legal field, as the wording of Section 71(4) the Act stipulates the requirement of adequate notice and reasons to be provided to the director only reference the contemplation by the Board of the proposed resolution. This position will need to be clarified by the South African Courts, and it remains advisable to provide the director with reasons in sufficient specificity for his/her removal, regardless of whether the Board or the shareholders contemplate such removal. It is further advised that this be adequately dealt with in the Company’s Memorandum of Incorporation, to ensure that there is no confusion or room for interpretation when contemplating the removal of a director by the Board and/or the shareholders. Better yet, it is advisable to provide a specific named person in the Memorandum of Incorporation with the power to remove directors.
WHO HAS THE RIGHT TO CONVENE A SHAREHOLDERS’ MEETING?
In terms of Section 61(3) of the Act the Board must convene a shareholders’ meeting if one or more written and signed demands for such meeting are delivered to the Company and —
each demand describes the specific purpose for which the meeting is proposed; and
in aggregate, demands for substantially the same purpose are made and signed by the holders, as of the earliest time specified in any of those demands, of at least 10% of the voting rights entitled to be exercised in relation to the matter proposed to be considered at the meeting.
Should the shareholders’ meeting be convened with the intention to contemplate the removal of a director, it is advised that the shareholder/s demanding the meeting, provide such demand together with the notice required in terms of Section 71(4) of the Act, and contemplated resolution.
RIGHTS OF RECOURSE
It must be noted that the Act specifically qualifies in Section 71(9) that nothing contained in Section 71 precludes a person who has been removed from office as a director from exercising any right that he/she may have had at common law, or otherwise, to apply to a court for damages or other compensation in relation to:
loss of office as a director; or
loss of any other office as a consequence of being removed as a director.
Should the Board determine that the director in question has not been negligent or derelict, or is not ineligible, disqualified or incapacitated, a director who was voted to be otherwise may apply to a competent Court to review the Board’s determination. Upon such an application the Court may either uphold the Board’s determination or remove the director from office.
The Board and/or shareholders also have Section 162 of the Act at their disposal, which allows an application to declare a director as delinquent or place the director under probation for a period of time. This application must be made while said director still holds office, or less than 24 months after he/she is removed or resigns from office. This application may be brought by the applicant on any of the grounds listed in Sections 162(5) and 162(7) of the Act. Should the director whose removal is contemplated have engaged in any acts or omissions stipulated in Sections 162(5) and 162(7), it is advised that the Company or Board or shareholders explore such conduct and the application for a declaration of delinquency.
CONFLICT OF INTEREST
Oftentimes, the situation may arise where a director also has shareholding in the Company. Consideration must then be given to the director’s ability to cast a vote on his/her own removal.
Directors are bound by corporate governance principles, and their fiduciary duties as directors to act in the best interest of the Company, and exercise unfettered discretion in the decisions they make. Should a director be allowed to vote on his/her own removal as a director at a Board meeting, the independence of the director, and his/her ability to exercise unfettered and objective judgment cannot exist. There would be a conflict of interest in respect of the director’s interest in the outcome of the voting process and passing of the resolution. It is advised that the director provide their verbal representations personally, or through their elected representative and then excuse themselves from the remainder of the meeting to avoid conflict of interest from arising.
Should the director be a shareholder of the Company, partaking in the contemplation of his/her removal as a director at a shareholders’ meeting, the director shall not be acting in his/her capacity as a director, thus he/she shall not be bound by the principles of corporate governance or directors’ fiduciary duties. When at a shareholders’ meeting, the director, in his/her capacity as a shareholder, may take part in the vote of their removal as director, and may validly have a weighted vote in respect of their shareholding.
It is advisable that this aspect of the removal of a director, or any other circumstance wherein a conflict of interest may arise, is regulated more stringently by the Company’s Memorandum of Incorporation, and the Shareholders’ Agreements in place.
CONCLUSION
The fiduciary duties of directors require that a director acts in good faith and in the best interests of the Company at all times. Directors must be mindful of the fact that they are still agents of the shareholders and they are primarily responsible for the growth of the Company and wealth and equity of the shareholders. Furthermore, as long as the shareholders are not in any manner acting in an oppressive or prejudicial manner towards other shareholders and/or the directors, and continue to act in the best interest of the Company, they can exercise their powers by removing directors from office rather effortlessly, as long as they can pass a 51% majority vote at a meeting.
For advice on company law or to set up a consultation, contact us on zelmari@kernattorneys.co.za or call us on 010 109 1055.
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