Mon, Dec 11, 2023

The official Financial Regulation Journal of SAIFM

The right to remove directors without giving reasons

Jesicca Rajpal and Wesley Fletcher

Section 71 of the Companies Act 71 of 2008 (the “Companies Act“) makes provision for the removal of directors by both the shareholders of a company and the board of directors of a company. While in the past there has been some uncertainty around what the law requires of these parties should they wish to remove a director, the High Court judgment of Miller v Natmed Defence (Pty) Limited and Others recently distinguished between and clarified the requirements for removal of a director by the shareholders vs removal by the directors of a company.

In order to remove a director of a company, various requirements need to be met in terms of section 71, which include, amongst others, that:

  • removal must be done by way of resolution taken at a board or shareholders meeting;
  • the impugned director must be given notice of the meeting and the proposed resolution; and
  • the impugned director must be given reasonable opportunity to make a presentation to the board or shareholders before the resolution to remove the director is put to a vote.

In Miller, the Court stated, however, that in respect of the requirement to provide an impugned director with reasons for the removal, section 71 of the Companies Act “draws a clear distinction between the removal of a director by the company’s shareholders and instances where the board of directors seek to remove a director.

Relevant Facts

In 2017, Mr Miller concluded two oral directorship agreements with the authorised shareholder representative of Natmed Defence (Pty) Ltd and Chalcid (Pty) Ltd. In 2018, by agreement, Mr Miller resigned from Chalcid. On 24 April 2019 Mr Miller was notified of a shareholder’s meeting to be held on 30 April 2019 telephonically and was provided with a resolution which proposed, among others, his removal as a director of Natmed with immediate effect. The shareholder’s meeting took place on 30 April 2019, in the absence of Mr Miller or his representative, and the decision was taken to remove him as a director.

Mr Miller then launched an application to have his removal as a director set aside and for his reinstatement as a director of Natmed. He contended that his removal breached of section 71(2)(b) of the Companies Act. Mr Miller based this contention on the fact that he was not provided with reasons regarding why his removal as a director was proposed, and he was thus unable to make representations against the shareholders adopting such a resolution.

Counsel for Mr Miller suggested that section 71(2)(b), in addition to requiring that a director be given a reasonable opportunity to make a presentation, requires that reasons for the proposed removal be given to the director. Counsel stated that it was a pre-requisite that the director is able to make a presentation on the reasons for a proposed removal and not just on the fact that a removal had been tabled. The Court disagreed. Matojane J stated that the Companies Act is clear and a requirement cannot be ‘read in’ that reasons for the proposed removal be given to the director prior to the decision being taken by the shareholders.

The Court went on to state that the requirement that a director must be furnished with reasons for a proposed removal is expressly provided for in section 71(3) of the Companies Act, however this only relates to the removal of a director by the board of directors.

The crux of the distinction between the two types of director removals is that shareholders can remove directors (who serve at their behest) at will when they no longer support the director and do not have to provide reasons for doing so.

Lastly, the Court held that Mr Miller could not insist on remaining a director in circumstances where the shareholders no longer have trust that he can conduct the affairs of the company to their liking. The appropriate remedy for Mr Miller would lie in a claim for damages for loss of office as a director, as contemplated in section 71(9) of the Companies Act.

While the Miller case has clarified the process and requirements for removing a director, companies should exercise caution when undertaking the removal of a director. Steps ought to be taken to mitigate against the risk of claims arising from the removal of a director of a company, whether the removal is an undertaking by the shareholders or the directors of the company.

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