The original article can be found here.
Photo By: Canva
In the past, we have discussed the important role that directors play in the creation of a company that adds significant economic value to the South African economy. This issue is so important that the Institute of Directors South Africa (IoDSA) sent a comprehensive list of recommendations to the Zondo Commission of Inquiry on how to improve directorship in the country.
The other side of that coin is that directors can cause significant damage to a company. Dudu Myeni was a prime example of this.
How do shareholders remove a director that they are not happy with? Cliffe Dekker Hofmeyr recently wrote a thought leadership article discussing this topic.
Go-to tactic
The removal of a director, by way of the shareholders’ inherent right to do so by an ordinary resolution, (section 71 of the Companies Act 2008) is the typical initial go-to remedy when a breakdown in the relationship amongst shareholders and directors arise. The remedy should in theory be straightforward, but the Companies Act contains several pressure points and hurdles that shareholders must be aware of and overcome before they can remove a director from office. These pressure points and hurdles are substantive and procedural in nature, and if not complied with can result in the removal being declared invalid by a court of law.
It is thus important that shareholders acquaint themselves with the provisions of the Companies Act to ensure that the removal process is managed and implemented correctly.
The shareholders’ meeting
The first step in the removal process is to convene a shareholders’ meeting to vote on the removal of the affected director. In terms of section 61(3) of the Companies Act, either the board or any other person specified in the company’s memorandum of incorporation (MOI) or rules may call a shareholders’ meeting if one or more written and signed demands for such a meeting are delivered to the company.
The prescriptive nature of section 61 means that, unless something else is provided for in the MOI, shareholders cannot directly and unilaterally convene a meeting, even when the board fails to call the demanded meeting. This was confirmed in the case of CDH Invest NV v Petrotank South Africa (Pty) Ltd and Another [2018] 1 All SA 450 (GJ) where the court held that the board of a company has a duty to convene a meeting when a notice in terms of section 61(3) of the Companies Act has been served.
When the board of a company fails to carry out its duty to convene a meeting, then the only option available to the shareholders is to approach a court of law in terms of section 61(12) of the Companies Act for an order directing a date and time to convene the meeting. In Heatherview Estate Extension 24 Homeowners Association v Mahlatse Trading Enterprise CC and Others (22616/2019) [2019] ZAGPPHC 180 the court stressed that where the shareholders or members convene a meeting, it is unlawful and “their remedy, where the directors refuse or fail to convene a meeting on request in terms of s61(3) lies in subsection (12) i.e. to approach a court”.
Photo By: Canva
Reasons for the proposed removal should preferably be given
Section 71(2)(b) of the Companies Act states that before the shareholders of a company consider a proposed resolution to remove an affected director, the director must be afforded a reasonable opportunity to make representations before the resolution is put to a vote.
Section 71(2)(b) of the Companies Act is not clear as to whether reasons must be given to the affected director for purposes of making the representations to the shareholders. Certainly nothing in the section expressly says so (contrast this with the process relating to removal by the board, under section 71(3), which clearly provides that removal can only be made certain, narrow grounds). This has caused much debate as to whether reasons are indeed required, and if so, what the threshold for the adequacy or rationality of those reasons is. In the rather controversial decision of Pretorius and Another v Timcke and Others (15479/14) [2015] ZAWCHC 215 the court explained that by not knowing the reasons for the proposed removal, a director could not exercise his or her right to be heard as he or she would be in the dark on what the issues are. The court further explained that “rules of natural justice and the fundamental principle of audi alterem partem presupposes the right to place facts and evidence before the decision maker. A prelude to the exercise of the right includes the right to obtain information, particulars or documents so as to place the affected person in a position to meet the case that needs be answered.”
The court’s interpretation of section 71(2)(b) of the Companies Act places an onus on the shareholders to ensure that the reasons for the proposed removal are put to the affected director, and thus it is best to do so, even if the judgment is open to criticism.
The affected director must receive notice of the shareholders’ meeting
Making representations to the shareholders before the resolution is put to a vote is intertwined with the requirement that the affected director must receive notice of the shareholders’ meeting by the board of directors to adequately prepare for the meeting.
Once the shareholders’ demand has been served on the board of the company to convene a shareholders’ meeting, the board (as the convenor of the shareholders’ meeting) must meet to resolve to authorise the convening of the shareholders’ meeting and must invite the affected director to that board meeting even if the affected director will have to recuse themselves prior to the board deliberating and deciding on the matter. This means that when a board of directors’ meeting is being held, all board members must receive notice as provided for in section 73(4)(b) of the Companies Act. This admittedly makes for a potentially very awkward and fractious encounter with the affected director at the board meeting, but procedure must be strictly adhered to in director removal cases.
In conclusion, shareholders must be careful to faithfully comply with the Companies Act to successfully remove a director from office. Any misstep or non-application of the Companies Act can render any removal of a director from office suspectable to being set aside by a court of law.
