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Removing a director requires following procedures outlined in the company’s Memorandum of Incorporation (MOI) and the Companies Act 71 of 2008 (the “Companies Act” or the “Act”). The Companies and Intellectual Property Commission (CIPC) also plays a critical role. Here are the key steps and requirements.
Legal Standards and Misconduct
The Common Law considered with Sections 75, 76, 77 and 218 of the Companies Act set out the conduct expected of directors and their liability. Allegations of misconduct, such as disclosing confidential information, failing to disclose conflicts of interest, competing with the company, or not following company rules, can lead to removal. This is in addition to the conduct outlined in the King Report on Corporate Governance for South Africa IV (“King IV”).
Allegations of director misconduct can have serious ramifications for both the company and the director concerned. Not only can this result in the removal of a director or the prevention of taking office in future, but it also affects the director’s reputation. As such, allegations of misconduct are serious and should be treated with care, particularly until there is certainty regarding the accuracy thereof.
Grounds for Removal
Section 162, amongst other sections in the Act dealing with removals by the Company’s board, allows a director to be removed by court application for misconduct. The company, shareholders, directors, company secretary, employees, trade unions, the CIPC, or the Takeover Regulation Panel can apply for this.
Section 71 permits shareholders (specifically) to remove a director via resolution if the director is negligent or failing in duties.
Court Decisions:
In Pretorius v Timcke and others[1] the Western Cape High Court held that a director must be provided with reasons for their removal for the action to be valid.
Contrarily, the Gauteng High Court in Miller v Natmed Defence (Pty) Ltd[2]determined that the Companies Act does not require shareholders to provide reasons for the removal, asserting that directors serve at the behest of shareholders and can be removed at their discretion.
CIPC Guidance in re Removal by Shareholders:
The CIPC’s guidance note (2019) aligns with the Pretorius decision, requiring companies to provide proof that the director was informed of the reasons for removal. The guidance hasn’t been updated post-Miller, so the resolution and notice must include reasons like ineligibility, disqualification, incapacitation, neglect, or dereliction of duty.
Key Steps in the Shareholder Removal Process
- Convening a Shareholders’ Meeting:
A shareholders’ meeting must be convened to consider and vote on the resolution to remove a director. The director in question must receive notice of this meeting.
- Notice of Meeting:
The director must be given notice of the shareholders’ meeting at least equivalent to the notice period that shareholders are entitled to receive. This ensures that the director has sufficient time to prepare.
- Provision of Reasons for Removal:
Shareholders proposing the removal must provide reasons for this action. These reasons should be communicated to the director along with the notice of the meeting. This allows the director to prepare a defence or presentation to the shareholders.
- Opportunity for Presentation:
The director must be afforded a reasonable opportunity to make a presentation, either personally or through a representative before the resolution is put to the vote. This step ensures fairness and due process.
- Documentation and Filing with CIPC:
Several documents must be prepared and submitted to the CIPC to process the director’s removal. These include:
- Notice of the meeting and the resolution and proof that the director received the notice, which can be in the form of an acknowledgement of receipt or a read receipt.
- Proof that the director was given an opportunity to make a presentation which must be recorded in the minutes of the meeting.
- A statement setting out the reasons for removal. The grounds for removal are Ineligibility, Disqualification, Incapacitation, Neglect, or derelict performance of director’s functions.
- Minutes of the shareholders’ meeting or a copy of the resolution.
- Proof that a quorum was reached at the meeting.
Proof of shareholding (certified copy of share register and share certificates).
The notice of Change of Company Directors (CoR 39) reflects the status change.
Whilst shareholders possess the authority to remove directors, adhering to procedural requirements and understanding the legal landscape is essential to ensure compliance and avoid administrative hurdles.
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[1] (15479/14) [2015] ZAWCHC 215 (2 June 2015)
[2] (18245/2019) [2021] ZAGPJHC 352; 2022 (2) SA 554 (GJ) (24 August 2021)
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