Director removals under the Companies Act 71 of 2008

Director removals under the Companies Act 71 of 2008

Podcast

Director removals under the Companies Act 71 of 2008

Podcast

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They explore the two legal routes available under the Companies Act: removal by shareholders in terms of Section 71(1) and removal by the board in terms of Section 71(3). Each route has its own requirements, from notice periods to specific grounds for removal.

The discussion also covers the director’s right to be informed and to address the meeting before a decision is made, as well as the ongoing “reasons” debate. While the Act doesn’t always require reasons for removal, the CIPC still expects them before processing a change, making it best practice to include them.

The team highlights common procedural pitfalls, such as giving insufficient notice, skipping key steps, or attempting “round robin” removals all of which can result in the process being declared invalid. They also note that reinstatement is rare if a removal is challenged, with damages often being the only remedy.

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Transcript

Belinda Scriba: Welcome to CDH Conversations podcast. My name is Belinda Scriba and I'm a Director in Cliffe Dekker Hofmeyr's, Dispute Resolution department, and I'm being joined by Roxanne Bain, Professional Support Lawyer in our Corporate & Commercial department, Claudia Grobler and Azola Ndongeni, an Associate and Candidate Attorney in Dispute Resolution.

Today's discussion will be focused around the removal of company's Directors under the Companies Act of 2008.

This is a crucial and burning topic in both the boardrooms and our courts. When relationship dynamics amongst Directors and shareholders begin to change, or Director's performance in their scope of duty is in considered quite up to scratch it's important for all role players to understand their rights and responsibilities as well as the correct procedure to be followed. This will allow for the least disruptive transition following the decision to remove a direct end.

Claudia, could you start off with an overview of the legal framework for removing Directors under the Companies Act?

Claudia Grobler: Thanks, Belinda. The Companies Act of 2008 sets out two main ways in which Directors can be removed from their positions as such. These procedures cannot be bypassed despite the company's memorandum of incorporation or any agreements it's, or the they may have with the Director. Firstly, Section 71, subsection one of the Act gives shareholders the power to remove a Director by passing an ordinary resolution adopted at a shareholders meeting.

Then Section 71 subsection three of the Act gives the board consisting of more than two Directors the power to remove a fellow Director, however. This must be done in very specific circumstances, being where the Director has become disqualified or ineligible in terms of Section 69 of the Act or where they are incapacitated to the extent that they can no longer perform their duties as a Director, and it's highly unlikely that they'll regain that capacity within a reasonable time.

The board can also remove a Director where it believes that the Director has neglected or has become derelict in the performance of their functions as a Director. In relation to removals by both shareholders and the board, the Act advised that the Director must first be given notice of the meeting and of the proposed resolution to be taken at that meeting.

In addition to that, the relevant Director must be given a chance to make representations at the meeting before the resolution is put to a vote. This can be done either personally or through a representative of their choice. From a Director's perspective, the right to be heard before the vote is important and shouldn't be underestimated because it gives Directors an opportunity to address any misunderstandings underpinning the decision to have them removed and possibly influence the ultimate removal.

It's important to note that there is nuanced wording in the Act when addressing a shareholder's removal versus a removal by the board. Roxanne will deal with this in more detail.

Roxanne Bain: Thanks, Claudia. That's correct. So, the Act contains slightly different wording in relation to removal by shareholders versus removal by the board.

So, in relation to removal by shareholders, Section 71 2 states that the direct in question must be given notice, at least equivalent to what a shareholder would be entitled to receive, which would be either 15 or 10 business days depending on the type of company. As Claudia said, the Director must be given an opportunity to make represent at the meeting.

Importantly, no reference is made in the Act to having to set out reasons for the removal of the Director, where that Director is being removed by shareholders. On the other hand, section 71 sub four, which deals with removal by the board, that section provides that the notice must contain a statement listing the reasons for the proposed removal with sufficient detail to allow the Director to prepare a response.

So there has been some conflict in case law coming out of different high courts around where the shareholders have to give reasons for removing a Director. In 2015, Western Cape High Court held in Pretorius v Timcke that the right of a Director to be heard at the shareholders meeting is effectively meaningless if the Director has not been furnished with reasons for their proposed removal.

So for that reason, the court held that reasons must be given by shareholders for the removal of a Director. In terms of Section 71, even though the section doesn't explicitly provide for that. However, the Gauteng High Court in Miller v Natmed Defence (2021) and the Eastern Cape High Court in Besso Investments v Capeco Development (2024) held that reasons are not required to be furnished where a Director is removed by shareholders. They held this on the basis of the well-established principle that Directors serve at the behest of shareholders and shareholders may therefore remove Directors without cause. The courts held that the legislature deliberately preserve this right of the majority shareholders, and that the right to make representations on the part of the Director doesn't automatically imply a right to reasons. But having said all of that, even though we have this more recent case law confirming that shareholders do not have to give reasons, the company's and Intellectual Property Commission or CIPC appears to still be following the line of thinking set out in the earlier Timcke case. In other words, the shareholders must give reasons for the removal of the Director.

Although the Director is technically removed as soon as the resolution is passed, CIPC will not process the removal on their system unless the notice of meeting includes a statement of reasons. So it seems their thinking is that until the Supreme Court of Appeal has its say on this, reasons must be given. So it's wise to record at least some reasons in the notice just to avoid administrative headaches. The reasons in this case do not need to be extensive, and there are no particular rules for what constitutes a valid reason.

Azola will now speak to the procedural aspects of the removal procedure.

Azola Ndongeni: Thank you, Roxanne.

So in both circumstances, the Director must be given a reasonable time to prepare their response to be presented in the board or shareholder meeting before the vote may take place. And as mentioned by Roxanne, if it is removal by shareholders, then Section 62 is prescribed notice period also applies here, which is 15 business days before the meeting for public or nonprofit companies and 10 business days. In any other case.

Section 71 subsection five of the Companies Act then provides that if a Director has been removed by way of a board resolution, the Director or the person who appointed, that Director may then apply to court within 20 days to review that decision.

The courts have been very clear on the importance of procedural compliance in terms of the Companies Act. For example, in the Sharp v Buthelezi case of September in 2024, the Court set aside a Director's removal by shareholders' resolution because the meeting was not properly convened in that no proper notice was given, no opportunity for the Director to be heard was given, and there was also an attempt to use a round robin process, which is in complete contradiction with the Companies Act. It is also emphasised that these meetings cannot be by round robin because the Director's right to make representations overrides section 60 of the Companies Act, which allows for round robin resolutions by shareholders.

Belinda Scriba: Thank you, Claudia, Roxanne, and Azola I think another very important takeaway from the Miller v Natmed Defence (Pty) Ltd case is that in speaking to the rationale of shareholders', removals and not requiring reasons, is the court's emphasis that a Director can insist on remaining a Director in circumstance where a shareholder no longer has trust that he can conduct the affairs of the company to it's liking.

In circumstances where a Director takes umbrage with their parent rationale of their removal, the only remedy really available to that Director would be to claim damages as opposed to reinstatement. The claim for damages is in terms of section 79 1, which refers to damages for loss of officer, for Director, or loss of any other office as a consequence of being removed as a Director.

What is clear is that the courts will not easily interfere with the rights of a shareholder to have its Directors removed if they no longer trust the Director to manage their physically company. If shareholders lose faith in their Directors, irrespective of their reasons, the courts will generally uphold their decision.

On a final note, it is our view that the best practice is to document everything, provide the necessary notices, and even if not always required, provide reasons and afford the Director the opportunity to address the board and shareholders. Should there be any doubt about the process being followed by the Directors or shareholders, they're encouraged to seek advice from your attorneys before embarking on the removal of a Director.