Judicial differences

CDH directors Peter Hesseling and Dane Kruger, and candidate attorneys Luke Kleinsmidt and Jenny Harwin on navigating legal inconsistencies regarding director removals at the instance of shareholders

Section 71(1) and (2) of the Companies Act 71 of 2008 (Companies Act) empowers the shareholders of a company to remove an incumbent director by way of an ordinary resolution adopted at a shareholders’ meeting. The Companies Act is explicit that this power of the shareholders prevails over any provision to the contrary in the company’s memorandum of incorporation, the rules of the company and/ or any agreement between the shareholders, the company and the directors. However, the inconsistent manner in which the courts have, in recent cases, applied this legal principle has cast a degree of doubt over what was previously regarded as a relatively settled matter of law.

Two back-to-back decisions handed down by the Companies Tribunal of South Africa (Tribunal), each in direct contradiction of the other, illustrates that this inconsistency has seeped into the regulatory infrastructure, making the matter ever more uncertain for shareholders wishing to utilise the director removal right afforded to them in the Companies Act. The Companies Act distinguishes between director removals at the instance of the shareholders and the board. The powers of the board to remove a director are limited to removals on the basis of a closed list of grounds, including ineligibility to serve as a director, disqualification, incapacity and negligence or derelict performance of their duties. In contrast, no grounds for the removal of a director at the instance of the shareholders are prescribed in the Companies Act. The generality of this power is consistent with the company law principle that directors serve at the behest of the shareholders. A well-established principle of company law is that directors may be removed from their position on a company board at the discretion of the shareholders, provided the procedural requirements in respect of director removals by the shareholders are adhered to.

The Western Cape High Court’s judgment in the case of Pretorius and another v Timcke and others (Pretorius) cast a degree of doubt on this position as the court held that the removal of a director by way of a shareholders resolution in terms of Section 71(1) and (2) of the Companies Act is invalid and should be set aside unless the director is furnished with reasons for their proposed removal. Four years later, the Gauteng High Court in Miller v Natmed Defence (Miller) held that the court in Pretorius ‘impermissibly resorted to the remedy of reading in circumstances where the Companies Act is clear and the reading in not warranted’, and held that Section 71(1) of the Companies Act does not require shareholders to provide a statement with reasons for the removal as provided in 71(3). 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 shareholders who elected them. The shareholders can remove them at will without having to provide reasons’.

The CIPC’s guidance notes stipulate a defined approach to removing a director from a board

While many legal commentators are of the view that the approach of the court in Miller is likely correct in law – that there is no requirement for shareholders to give an incumbent director a list of reasons for their proposed removal in terms of Section 71(1) and (2) of the Companies Act – the judgment in Pretorius has not been overturned and remains binding in the Western Cape. This inconsistency in the case law has resulted in widespread uncertainty in determining the requirements for removing a director at the instance of the shareholders.

All director elections, appointments and removals are filed with and processed by the Companies and Intellectual Property Commission (CIPC). Procuring that a director removal is duly processed by the CIPC without delay is an additional administrative step that should be considered when charting a course in relation to a proposed director removal by the shareholders.

The CIPC published a guidance note in 2019 providing that, when a director is to be removed in terms of Section 71(1) of the Companies Act by means of an ordinary resolution of the shareholders, for the CIPC to process the removal, certain documents are required during filing, namely a notice of the meeting and the resolution, as well as proof that the director to be removed was awarded the opportunity to make a representation; a statement setting out the reasons for removal; minutes of the meeting or a copy of the resolution by the shareholders; proof that a quorum was reached at the meeting (attendance register); proof of shareholding (certified copy of share register and share certificates); and the notice of Change of Company Directors (CoR39 form) reflecting the correct status change (removal). The CIPC guidance note appears to be consistent with the application of the law in the Pretorius case. Notably, the CIPC guidance note was not updated nor retracted after the judgment in Miller was handed down. Consequently, the CIPC has been rejecting director removals made in terms of a shareholders’ resolution where the company is unable to provide proof that reasons were given to the director for such removal.

This approach of the CIPC was re-affirmed by the Tribunal in March 2023 in the case of Applied Cyber Defense Systems v Commissioner of the Companies and Intellectual Property Commission, wherein the Commissioner reiterated that the requirements for the removal of a director, in accordance with the CIPC guidance note, are that the director must have been given a reasonable opportunity to make a presentation during the meeting regarding their removal; and the director must have received prior notice of the reasons for the removal (i.e. prior to the decision being made in order to make a presentation in their defence). The Tribunal then performed a rapid about-turn in April 2023, only a month later, in the case of Daily Grind Innovation Hub v Companies and Intellectual Properties Commission. While the facts of this case did not relate directly to the reasons for the removal of a director, the Commissioner outlined the procedures that must be followed and confirmed the decision of the courts in Miller, in providing that when shareholders remove a director in terms of Section 71(1) and (2) of the Companies Act, no reasons need to be provided by the shareholders for such removal. Notwithstanding this apparent change of approach by the Tribunal, to date the CIPC guidance note has not been revoked or updated, leaving the matter subject to continued uncertainty.

While the Tribunal’s most recent decision appears to be applying the approach adopted in the Miller case, the CIPC has not yet published an updated note wherein it confirms companies no longer need to prove that reasons for the removal of directors by the shareholders were given to the director in order to process the removal. In terms of judicial precedent, the Pretorius judgment remains binding on courts in the Western Cape while the Miller case is binding on courts in Gauteng.

Moreover, notwithstanding any decision of the Tribunal and guidance notes published by the CIPC, the decision of a High Court will always trump the Tribunal’s decision and the CIPC guidance notes. Therefore, a decision made by the Tribunal holds little to no legal weight if there has been a High Court judgment on the same matter. Yet, for administrative ease there’s value in complying with the CIPC’s requirements.

It would be prudent for shareholders wishing to procure the removal of an incumbent director by way of shareholder resolution to follow this course of action. A shareholders’ meeting must be convened to consider and, if appropriate, approve the removal of the director, and the director must be given notice thereof. The director concerned must also be given sufficient notice of the meeting. The reasons for the proposed removal must be communicated to the director, who should in turn be afforded a reasonable opportunity to make a presentation before the resolution is put to a vote at the shareholder’s meeting. Finally, the reasons for the proposed removal should be stated at the meeting, and this, together with a record that the director was afforded an opportunity to make a presentation at the meeting, should be recorded in the meeting minutes that will be submitted to the CIPC as part of the removal filing.

+27 (0)21 481 6300
[email protected]