COSEC SERIES: CAN A DIRECTOR BE REMOVED BY THE SHAREHOLDERS WITHOUT GIVING PROPER REASONS?

INTRODUCTION:

A central theme coming out of the Companies Act 71 of 2008 (“the Companies Act“) is the clear separation of powers between the shareholders of a company on the one hand, and the directors of such company on the other. In a number of our previous articles exploring the Companies Act, we touched on the idea that directors are given the statutory power to take responsibility of the effective management of a company and occupy a fiduciary position in this regard. Shareholders, on the other hand, are not legally obliged to observe any duties as their main aim is to ensure that the company is able to secure a profit from their investment. Since the Companies Act lays out a clear distinction between ‘management’ and ‘control’, shareholders sometimes elect their own directors to protect their interests and the interests of the company alike. Having said that, we are often asked what recourse is available if that relationship of trust subsequently breaks down and the director concerned is no longer able to carry out his/her duties in a manner that would best serve the interest of the company or shareholders. Can such director then be removed by the appointing shareholder or do all shareholders have to consent; what is the process; and do reasons need to be given for such removal? For the purposes of this article, we will focus specifically on the process of removing a director by the shareholders. The right of the board itself to remove a director will be discussed in our next article. 

REMOVAL OF DIRECTORS IN TERMS OF SECTION 71(1) AND (2) OF THE COMPANIES ACT:

Section 71(1) of the Companies Act states the following: 

Despite anything to the contrary in a company’s Memorandum of Incorporation or rules, or any agreement between a company and a director, or between any shareholders and a director, a director may be removed by an ordinary resolution adopted at a shareholders meeting by the persons entitled to exercise voting rights in an election of that director, subject to subsection (2).

Section 71(2) further reads:

Before the shareholders of a company may consider a resolution contemplated in subsection (1) –

(a) the director concerned must be given notice of the meeting and the resolution, at least equivalent to that which a shareholder is entitled to receive, irrespective of whether or not the director is a shareholder of the company; and

(b) the director must be afforded a reasonable opportunity to make a presentation, in person or through a representative, to the meeting, before the resolution is put to a vote.

Following from the above, it can be seen that a director can be removed as long as the majority of the shareholders entitled to exercise voting rights in the election of that director agree by ordinary resolution (i.e. 50% plus 1) provided that a duly constituted shareholders meeting is held (you can refer to some of our previous articles for the legal requirements for calling a shareholders’ meeting) and the director concerned is afforded a reasonable opportunity to make a presentation. Based on our interpretation of section 71(2) no particular grounds for removal need to be provided, but in practice, the notice of meeting itself will put forward a number of reasons which the director will then be able to answer to when making the presentation. 

PRACTICAL STEPS THAT NEED TO TAKE PLACE:

It is a statutory right of shareholders to remove a director, but since the potential impact can be quite drastic, the Companies and Intellectual Property Commission (“the CIPC“) has prepared a guidance note (see Notice No. 42 of 2019) setting out the process requirements that need to be adhered to before it will amend the status of a director in this manner and remove him/her from the CIPC records, despite internal requirements of the company having been met. In order for the notice of removal of directors to meet the processing requirements of the CIPC, the following documents must be filed:

  • Notice regarding the meeting and the resolution, as well as proof that the director to be removed was awarded the opportunity to make a presentation; 
  • Statement setting out the reasons for removal; minutes of meeting or copy of the resolution by the shareholders; 
  • Proof that a quorum was reached at the meeting (i.e., attendance register); 
  • Proof of shareholding (certified copy of share register and share certificates); and
  • Notice of Change of Company Directors (i.e., CoR 39) reflecting the correct status change (i.e., removal).

In our experience, it is not enough to simply meet the legislative requirements for the removal of a director, since failure to meet the CIPC requirements can lead to a number of unnecessary queries and ultimately result in the application to be rejected. Practically, the CIPC requirements will need to be met in addition to what is prescribed by legislation.

CONCLUSION: 

The removal of directors is a seemingly simple process and even though the Companies Act does not prescribe that any reasons need to be provided, it is advisable that sufficient reasons are provided in advance so as to allow the director concerned to be afforded a “reasonable opportunity” to make a presentation.

Interested to find out more?