South Africa: The Right Of A Director To Contest A Resolution Of The Board Removing Him From Office

Last Updated: 19 November 2013
Article by Roodt Inc

The contested removal of a director from office by a resolution of the board

The decision of the Western Cape High Court in Pretorius v PB Meat (Pty) Ltd [2013] ZAWCHC 89, in which judgment was delivered on 14 June 2013, is the first High Court decision on the interpretation of section 71 of the new Companies Act 71 of 2008.

This section governs the removal from office of directors.

Section 71(3) and (4) provide for the situation where, in a company that has more than two directors, a shareholder or director of the company alleges that a director has become ineligible or disqualified to hold office as a director, or is incapacitated from holding such office, or has neglected or been derelict in the performance of his directorial functions.

Whether a person is ineligible to be a director or is disqualified from being a director, as envisaged in this provision, are issues that can be determined objectively in terms of criteria laid down in the Act. By contrast, whether a person has neglected his directorial duties or been derelict in their performance may be far more difficult to establish, and allegations in this regard may be made with ulterior and self-serving motives.

Where such an allegation is made, the Act now requires that the company's board of directors, other than the director in question, is obliged to determine the issue by way of a board resolution and the board is explicitly given the power to remove a director whom it has determined to be so ineligible or disqualified, incapacitated or negligent or derelict, as the case may be.

The director is entitled to be furnished with a statement of the reasons for his proposed removal, with reasonable specificity

Section 71(4) – which was the focus of this particular judgment – goes on to provide that –

"Before the board of a company may consider [such] a resolution . . . the director concerned must be given –

(a) notice of the meeting, including a copy of the proposed resolution and a statement setting out reasons for the resolution, with sufficient specificity to reasonably permit the director to prepare and present a response; and

(b) a reasonable opportunity to make a presentation, in person or through a representative, to the meeting before the resolution is put to a vote."

In this particular matter, the central issue for determination by the court was the interpretation of the requirement that, before the board considers such a resolution, the director in question must be given –

"a statement setting out reasons for the resolution, with sufficient specificity to reasonably permit the director to prepare and present a response".

By contrast, the now-repealed Companies Act of 1973 required only that special notice be given to the director in question of such a proposed resolution and that he had a right to be heard at the meeting in question and was entitled to make written representations to the company and to require that those representations be notified to members of the company; see section 220(2) of that Act.

It needs to be borne in mind that the shareholders meeting has an unfettered right to remove directors (even in the face of a contract to the contrary; see section 71(1) of the Companies Act 2008) and that a decision in this regard by way of an ordinary resolution cannot be challenged, for shareholders are not subject to a fiduciary duty.

Indeed, this principle is the corner-stone of the concept of corporate democracy that is the tacit underpinning of company law systems that are based on English law, and this cardinal principle is not overturned by the new Companies Act. Section 73(3) will be triggered only where the aggrieved shareholders do not have the voting power to pass a resolution at a shareholders meeting for the removal of the director in question, or where the impetus to remove a director comes from another member of the board and not from the shareholders.

It is a novelty that the board of directors is now given the power, in adjudicating on an allegation made by a shareholder or director in this regard, to determine that the director in question be removed from office, and the novelty in this regard is acute where the allegation of misconduct has come from a member of the board, and not from a shareholder.

It is likely that the decision in Pretorius v PB Meat (Pty) Ltd will be the precursor of many forensic battles between minority shareholders and directors, and between directors inter se, for nothing is more common than a battle to control a company through the power to determine who shall be its directors.

Previously, this was a decision for the shareholders alone, with directors being appointed by a resolution of the shareholders meeting, and holding office until they resigned or were removed by a similar resolution or by an order of court.

The director's right to request a statement of reasons for the resolution

In this particular case, letters were served on two directors which gave notice, on behalf of the company, that a board meeting was being convened to consider a proposed resolution to remove them from office on the basis that they had been derelict in the performance of their duties.

The directors' attorney then delivered an eight page "request for further particulars" in terms of section 71(4)(a), to which the company duly furnished a written reply. The directors' response was that this reply fell short of what would reasonably enable them to prepare a response for presentation at the forthcoming board meeting.

The issue to be decided by the court was whether the tape recordings and documents furnished by the company in response to the directors' request for reasons (wrongly characterised by their attorney as a request for "further particulars") satisfied the sufficient specificity requirement in section 71(4)(a) of the Act.

The background to the dispute

The background to this dispute was that the two directors in question had, despite repeated requests, refused to resign as directors, despite a provision to the contrary in their respective service agreements.

In essence, the company's statement of reasons for the proposed resolution to remove the directors in question was that, acting in concert, they had unlawfully removed certain equipment owned by the company from its premises in order to use it for private purposes; that they had unlawfully disposed of such equipment and retained the proceeds instead of paying them over to the company. It was further alleged that the directors in question had unlawfully appropriated cash belonging to the company and had unlawfully made a personal profit that ought to have accrued to the company.

There was no provision in the old Companies Act of 1973 for reasons to be given

The difficulty facing the court was that the sufficient specificity requirement in section 71(4)(a) of the Companies Act 2008 has no comparable antecedent in the repealed Companies Act of 1973, and the court thus had to determine its meaning de novo.

Although the companies legislation of England and Australia required that a director, whom the shareholders wished to remove from office, had to be given notice of the proposed resolution, the legislation of these countries did not go so far as requiring that sufficiently detailed reasons had to accompany the notice; little guidance could therefore be derived from these jurisdictions.

The court accepted that the phrase sufficient specificity in this context meant sufficiently detailed reasons to mount a response and looked for guidance to the pre-dismissal procedure required by the Labour Relations Act 66 of 1995 as laid down in Avril Elizabeth Home for the Mentally Handicapped v Commission for Conciliation, Mediation & Arbitration & Others (2006) 27 ILJ 1644 (LC).

The grounds for the directors' application to court

The directors based their application to court for relief on two grounds; see para [19] and [22] of the judgment.

The first ground was that they were entitled to the requested information in their capacity as directors of the company in that they had a statutory obligation as directors to manage the company in terms of section 66(1) of the Act and would be unable to do so if they were refused access to the documents in question.

The court rejected this argument, pointing out (at paras [23] and [27]) that, on their own versions, the directors in question wanted to have sight of the documents, not in order to manage the company, but for the sole purpose of preparing and presenting a response to the allegations against them. The court also ruled (at para [28]) that the directors in question were not entitled as of right in their capacity as such, to the documents in question.

The second ground relied on by the directors in question was that they were entitled to the documents they had requested in terms of section 50(1) of PAIA (the Promotion of Access to Information Act).

The court pointed out, in this regard, that an applicant is not required to establish a clear right worthy of protection, but is merely (on the basis of the decision in Claase v Information Officer, South African Airways (Pty) Ltd 2007 (5) SA 469 (SCA)) required to "put up facts which prima facie, though open to some doubt, establish that he has a right which access to the record is required to exercise or protect."

The court rejected the directors' arguments

Having considered the arguments pro and contra, the court concluded (at para [44]) that the documents required by the directors in question would not assist them in exercising or protecting their rights as envisaged in section 50 of PAIA.

The court said (at para [45]) that what the directors were seeking, in effect, was "to embark on a full-scale forensic audit of the company" and that, far from bringing the dispute to a short, sharp end, this was more likely to "escalate it into a full-blown, costly, elaborate and lengthy exercise" which was not what was envisaged in section 71(4)(a) of the Companies Act 2008.

The court ruled (at para [46]) that the directors in question had already been provided with sufficiently detailed reasons to mount a response to the allegations against them.

The nub of the judgment

The major interest of the decision is that the court made clear that it would not countenance a request for reasons, in terms of section 71(4)(a), for a proposed resolution to remove a director being turned into a full forensic audit of the company's affairs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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