Removal of a director by shareholders of a company: reasons not necessarily to be provided

shareholders
27 Mar 2023

Section 71(1) of the Companies Act, 2008 allows for the removal of a director of a company by the shareholders of that company, by way of an ordinary resolution adopted at a shareholders meeting.

Section 71(2) describes the prescribed process that must be followed. It requires that before the shareholders of the company may consider the resolution for the removal of the concerned director –

(a) the director must be given notice of the meeting and the resolution, at least equivalent to that which a shareholder is entitled to receive, irrespective of whether or not the director is a shareholder of the company; and

(b) 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 judgment of the Western Cape Division (Cape Town) of the High Court in the matter of Pretorius and Another v Timcke and Others (15479/14 [2015] ZAWCHC 215 (2 June 2015) stated that the requirement in section 71(2)(a) that the concerned director must be afforded “reasonable opportunity to make a presentation”, must be read to require that reasons for the proposed removal be given to the concerned director prior to the resolution being considered by the shareholders of the company and put to a vote.

Recently, however, in the matter of Miller v Natmed Defence (Pty) Ltd (18245/2019) [2021] ZAGPJHC 352, the Gauteng Local Division (Johannesburg) of the High Court, disagreed with the Pretorius judgment and confirmed that the shareholders of a company are not required to give reasons for their decision to remove a director.

Mr Miller had approached the court for an order to, amongst others, set aside the decision by the shareholder of Natmed Defence (Pty) Ltd (of which company Mr Miller was a director) to remove him as a director of the company.

Mr Miller alleged that the shareholder of the company had not complied with the requirement of section 71(2)(b) of the Companies Act, in that –

– he (Miller) was not given any reasons as to why his removal was proposed, in order to enable him to make representations;

– the notice of the meeting was given less than 10 business days before the meeting, in breach of section 62(1)(b) of the Companies Act; and

– the shareholders meeting that was held to consider the resolution to remove him was held telephonically and in breach of section 63(2) of the Companies Act.

The court noted that sections 71(1) and 71(2) of the Companies Act do not contain language requiring the shareholders of a company to provide a director, proposed to be removed as a director, with a statement of reasons for the proposed resolution. The court further held that:

– the legislature has deliberately preserved the right of the majority shareholders to remove a director who they no longer support;

– directors serve at the behest of the shareholders who elected them; and

– the shareholders can remove directors at will without having to provide reasons.

– The shorter notice periods did not prejudice Mr Miller to such an extent that it would warrant setting aside the shareholder’s decision and prohibit the shareholder from exercising the shareholder’s statutory right to remove Mr Miller.

Unfortunately, a generally binding decision on the subject matter still needs to be made by a court of higher instance. At this stage the Pretorius judgment will still be authoritative within the jurisdiction of the Western Cape Division (Cape Town) while the Miler judgment will be authoritative within the jurisdiction of the Gauteng Local Division (Johannesburg) of the High Court.

See also:

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)
Zelmaine van der Westhuizen

Zelmaine van der Westhuizen is a Director in GMI’s Corporate and Commercial Department. Zelmaine joined GMI as a Candidate Attorney in 2004, and was admitted as an Attorney in 2005,... Read more about Zelmaine van der Westhuizen

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