Do shareholders need to give reasons for removing a director?

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Aslam Moosajee and Shenaaz Munga

In terms of the Companies Act, 2008, a director may be removed by an ordinary resolution passed by the shareholders at a shareholders’ meeting.

The Act sets out the procedure that should be followed in such circumstances:

  • The director in question must be given notice of the meeting and the resolution; and
  • 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.

The question that arises is whether shareholders need to provide reasons for the proposed removal of a director.

The Western Cape High Court, in the case of Pretorius and Another v Timcke and Others, considered this question. In this case, PB Meat (Pty) Limited’s shareholders gave notice to two directors of their intention to remove them by way of a resolution.

The directors’ representative attended the shareholders’ meeting and requested the shareholders’ reasons for the proposed removal. The shareholders adopted the position that the directors were not entitled to reasons but stated that the shareholders no longer wanted the applicants to remain as directors. The shareholders proceeded to pass the resolution to remove the directors.

The directors challenged the shareholders’ decision. The Western Cape High Court held that the shareholders’ notice was defective because of the failure to provide reasons for the proposed removal of the directors and consequently, the court set aside the resolutions taken by the shareholders.

The court held that the disclosure by the shareholders that they no longer wanted the applicants to remain as directors did not constitute reasons but was a “finding or conclusion”. The court also held that an affected director cannot make representations without being furnished with reasons for his or her intended removal.

The court was of the view that, in the absence of such reasons the requirements for removal set out in the Companies Act would be rendered superfluous. The court concluded that without the reasons for the proposed resolution being known, the directors were not afforded the fundamental right to be heard.

However, the Johannesburg High Court’s judgment in Miller v Natmed Defence (Pty) Limited reached a different conclusion..

In this case, Mr Miller sought to be reinstated as a director of Natmed Medical Defence (Pty) Limited.

Mr Miller was appointed as a director of Natmed in about June 2017. On 24 April 2019, Mr Miller was notified of a shareholders’ meeting to be held on 30 April 2019. The main resolution proposed was Mr Miller’s immediate removal as a director of Natmed. The meeting proceeded on 30 April 2019 in Mr Miller’s absence, where a decision was taken to remove him as a director.

Mr Miller contended before the Johannesburg High Court that his removal as a director fell foul of the Companies Act because he was not provided with reasons for his proposed removal as a director.

Relying on the Western Cape High Court judgment, Mr Miller argued that the requirement in the Companies Act that a director be given a reasonable opportunity to make a presentation should be read to require that reasons for the proposed removal be given prior to the shareholders’ making a decision about the removal of a director.

The Johannesburg High Court disagreed with the finding by the Western Cape High Court in the Pretorius case and commented that the Western Cape High Court “resorted to the remedy of reading in, in circumstances where the Companies Act is clear and the reading in [is] not warranted”.

The Johannesburg High Court highlighted that section 71(3) of the Companies Act (which deals with the removal of a director by the board of directors) expressly records that where a board of directors intends to remove a director, the concerned director must be given notice of the meeting, a copy of the relevant resolution together with a statement of reasons for the resolution. However, sections 71(1) and (2) do not stipulate a need for the shareholders to provide the director with a statement setting out the reasons for the proposed resolution. Accordingly, it was held that shareholders cannot be obliged to give reasons as this was not the intention of the legislature.

The Johannesburg High Court held that Mr Miller could not insist on remaining a director of Natmed in circumstances where the shareholders no longer wanted him to serve as director. Mr Miller’s claim for the setting aside of the decision by the shareholders to remove him as director and for reinstatement were accordingly dismissed.

In addition to the relief relating to his reinstatement as a director, Mr Miller also claimed payment of director fees for the two months prior to his removal and a bonus. The Johannesburg High Court found in Mr Miller’s favour in relation to these claims.

In view of the conflicting judgments that exist in relation to whether a removal by shareholders of a director is to be preceded by the shareholders providing the director with reasons for the proposed removal of the director, these two cases are not likely to be the last word on the issue. It is left to be seen which judgment the other High Courts follow and hopefully, the issue will one day be considered by the Supreme Court of Appeal and the Constitutional Court.

Given the difference in wording between section 71 (1) and (2) on the one hand and section 71 (3) and the fact that a shareholder should be entitled to remove a director as and when it deems fit, it will not surprise us if the reasoning in the Miller case is ultimately adopted by other High Courts, the Supreme Court of Appeal and the Constitutional Court.

This article was first published by ENSafrica (www.ENSafrica.com) on 28 June 2022.

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