Introduction
Directors play an integral role in the functioning of a company with section 66(1) of the Companies Act of 2008 (“the Act”) conferring upon them the power to manage the business and affairs of the company. In line with the level of responsibility held by directors, section 76 outlines fiduciary duties to be strictly adhered to, lest directors face consequences; one of the possible consequences that a director may face is his removal from the board in terms of section 71 of the Act. Importantly, the Act distinguishes between the removal of a director by shareholders and the board of directors, with a more onerous burden placed on the latter. This article seeks to analyse this differentiation and possibly question its tenability.
The removal of a director by the shareholders of a company
Section 71(1) of the Act is an unalterable provision which provides that a director may be removed from the board through an ordinary resolution adopted by the shareholders who are entitled to exercise voting rights in the election of the director. According to section 71(2) of the Act, the director set to be removed ought to be given notice of the meeting and the resolution equivalent to what a shareholder is entitled to and the director or his representative shall be provided an opportunity to make a presentation to that meeting before the resolution is put to a vote.
The removal of a director by the board of directors
In terms of section 71(3) of the Act, the board of a company (“the Board”) with more than two directors may remove a director if a director or shareholder has alleged that the director concerned has become ineligible or disqualified in terms of section 69 of the Act (save for the grounds set out in section 69(8)(a)), the director has become incapacitated to the extent that they are unlikely to perform their functions or regain capacity within a reasonable time, or the director has neglected or been derelict in the performance of their duties as a director. However, section 71(4) qualifies the aforementioned powers by placing an obligation on the Board to give the concerned director notice of the meeting and a copy of the proposed resolution as well as a statement outlining the reasons for the resolution with sufficient particularity to allow the director or his representative to respond adequately through a presentation prior to the resolution being put to a vote.
The differentiation between a removal effected by the board of directors and one effected by a shareholder
As demonstrated above, the Act requires the Board to provide the director concerned with reasons for the proposed removal, while no equivalent obligation is placed on shareholders who seek to effect the removal of a director. The pertinent question which forms the basis of this article is whether this differentiation is just. The courts have adopted different approaches to the removal of a director, with some courts giving effect to the wording of the provisions while others deviate on the basis of fairness. The High Court in Pretorius and Another v Timcke and Others adopted a rather transformative approach to the removal of a director by a shareholder. The court heard a matter involving the removal of directors in terms of section 71(1) of the Act whereby the directors were not given reasons for their removal.
The shareholders argued that the Act did not confer upon them a responsibility to provide reasons, but the court did not accept this submission. According to the court, directors cannot be expected to make representations at the meeting without being given reasons for the proposed removal. Although the provision itself does not explicitly provide for reasons, an alternative reading of the provision would render the provision ineffective. This position was not upheld in subsequent cases heard by the High Court. More recently, the court in Miller v Natmed Defence (Pty) Ltd and Others heard a matter whereby Miller was set to be removed as a director by the shareholders of Natmed Defence (Pty) Ltd. The court likewise had to determine whether the shareholders had a duty to furnish Miller with reasons for the removal—this was answered in the negative. The court did not deem it fit to read into the provisions of section 71(1) and (2) where the wording is clear; evidently, the court differed from that in the Timcke case. In justification of its position, the court highlighted the inherent right attributed to shareholders to appoint directors, the corollary of that being the right to remove directors at their behest.
The legislature undoubtedly had sound reasons for distinguishing between the removal of a director by a shareholder and one effected by the Board. Therefore, the only aspect of section 71 of the Act which is being analysed is the less onerous burden placed on shareholders electing to remove a director. This is particularly significant given the Board’s obligation to provide reasons, notwithstanding that the Act already delineates the grounds for director’s removal, which is not done with respect to shareholders. One would assume that the absence of a framework governing the reasons for the removal of a director by a shareholder would create a statutory obligation to furnish such director with reasons as required by the Board in terms of section 71(4)(a) of the Act. It is contended that directors play an extremely important role in the operation of business, should arise where one ought to be removed, such a director should be given reasons. This is in keeping with the doctrine of audi alteram partem. The idea that a director may be removed from his position in the absence of reasons is simply untenable.
Interestingly, the Companies Amendment Act has since introduced amendments to section 72, while section 71 remains unchanged. This legislative divergence is noteworthy, as it suggests a deliberate choice on the part of the legislature to refine the framework governing board committees without revisiting the provisions regulating the removal of directors, notwithstanding the interpretive and practical challenges that section 71 continues to present.
Conclusion
Our courts have adopted different views when deciding whether shareholders have an obligation to furnish a director with reasons for his removal. It seems the prevailing view is premised on giving effect to the wording of the legislature when interpreting the provision. To this effect, a shareholder does not need to furnish a director with reasons for his removal from the board. Although this is the current position, it would not come as a surprise if the provision faces scrutiny in future as it fails to account for the inherent right to understand the reasons for your removal from a position.