In terms of Section 66(1) of the Companies Act (2008) (“the Companies Act”), the business and affairs of a company must be managed by or under the direction of its board of directors, which has the authority to exercise all of the powers and perform any of the functions of the company, except to the extent that the Companies Act or the company’s Memorandum of Incorporation provides otherwise.

To ensure that the board of a company carries out this management responsibility in a proper manner, each director of a private company is subject to several statutory fiduciary duties recorded in Section 76(2) and 76(3) of the Companies Act as well as common law fiduciary duties.

It quite frequently happens that the directors or shareholders of a company wish to remove a director from the board for any number of reasons.

The rights of directors to remove a co-director and the rights of shareholders to remove a director however differ in material ways and careful consideration should be given to following the correct procedure.

In terms of Section 71 of the Companies Act there are two distinct methods to remove a director from office, namely:

  • Removal by shareholders; and
  • Removal by the directors.
  1. REMOVAL BY SHAREHOLDERS
  • In terms of Section 71(1) of the Companies Act, the shareholders of a company can remove a director from office by ordinary resolution (which is normally an ordinary majority of the votes exercised on the resolution when a quorum has been established).
  • It is important to note that Section 71(1), in effect, allows the shareholders to remove a director by ordinary resolution without cause, as there is no limited set of circumstances or actions committed or omitted by the director that has to exist for shareholders to remove a director.
  • The rights afforded to shareholders in terms of Section 71(1) are strongly protected in the Companies Act and cannot be contracted out by the director or be restricted in the company’s Memorandum of Incorporation or rules.
  • Before the removal of a director can be voted on by the shareholders, however, Section 71(2) of the Companies Act requires compliance with the following two requirements, namely:
  • The director in question must be given notice of both the shareholder’s meeting and the proposed resolution to remove him/her from office, which notice period must be equivalent to the notice that a shareholder is entitled to receive for the proposed shareholders’ meeting (normally not less than 10 (Ten) business days); and
  • The director in question must furthermore be afforded a reasonable opportunity to make a presentation at the shareholder’s meeting, whether in person or by means of a representative, before the resolution to remove him/her is put to a vote. To enable the director to make a proper presentation at the shareholders’ meeting, the Western Cape High Court in the matter of Johannes Jacobs Pretorius & 1 Other v Steven Edward Timcke & 3 Others, Case Number 15479/2014, held that the director must be provided with reasons for his proposed removal, although this requirement is not required by the Companies Act.
  • Due to numerous issues arising from non-compliance with the aforesaid requirements, the Companies and Intellectual Properties Commission (“CIPC”) released Practice Note 40 of 2015, stating the following:
  • When a director is removed in terms of Section 71(1) by means of an ordinary shareholders resolution, the following supporting documents need to be present during filing:
  • Proof that the notice was indeed sent to the director in question;
  • An attendance register must be kept and provided as proof of the attendance of shareholders at the meeting; and
  • A certified copy of the share register to serve as proof of shareholders entitled to vote at the meeting.
  1. REMOVAL BY THE DIRECTORS
  • In terms of Section 71(3) of the Companies Act, where a company has more than 2 (Two) directors, and either a shareholder or director has alleged that another director of a company has:
  • become disqualified or ineligible to be a director of the company;
  • become incapacitated to the extent that the director is unable to perform the functions of a director, and is unlikely to regain that capacity within a reasonable time; or
  • neglected, or been derelict in the performance of, the functions of the director,

the board, other than the director concerned, must determine the matter by resolution, and may remove a director whom it has determined to be ineligible, disqualified, incapacitated, negligent or derelict, as the case may be.

  • The removal of a director in terms of Section 71(3) can be done by board resolution, but is subject to the following requirements as set out in Section 71(4):
  • the director in question must be provided with notice of the meeting, including a copy of the proposed resolution and a statement setting out reasons for the resolution, with sufficient specificity to reasonably permit the director to prepare and present a response; and
  • the director in question 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.
  • The CIPC issued Practice Note 40 of 2015 which states the following in regard to a Section 71(3) removal:
  • When a director of a company is removed by the board of directors on the grounds of ineligibility, disqualification, incapacitation, neglect or dereliction, the company must have more than 2 (Two) directors and the following supporting documents must be present:
  • Proof that notice was sent to the director in question with the required information in accordance with Section 71(4)(a); and
  • The attendance registers of the meeting held to remove such a director.
  • Where a company has fewer than 3 (Three) directors, Section 71(8) of the Companies Act entitles any director or shareholder to apply to the Companies Tribunal to make a determination for the removal of a director.
  1. CRITICAL CONSIDERATIONS
  • In most instances where a director is removed from office either by shareholders or directors, there is an element of animosity present. It is therefore critical to ensure that any steps taken to remove the director is done with the following in mind:
  • The notice of the meeting to remove the director (whether at a shareholders meeting or board meeting) must be called in compliance with the provisions of the Companies Act, in particular Section 71, but also in accordance with the company’s Memorandum of Incorporation. Failure to give proper notice could result in the meeting and any resolutions passed at the meeting being void.
  • A director will in many cases also be an employee of the company. Careful consideration should therefore be given to whether the removal as director of the company will have any impact on the employment relationship between the director and the company, which may be subject to the provisions of the Labour Relations Act.

 

Should you find yourself in the difficult position of having to remove a director from your company, contact one of our corporate law experts to assist you with the process and the avoidance of legal pitfalls that could result in a waste of time and costs.

 

Louis Stroebel

LLB; LLM (Import/Export Law)

Director

Corporate and Commercial Law

E-mail: Lstroebel@sstlaw.co.za

Phone: 012 361 9823