Trouble in paradise: removal of a Director

When a director’s actions are not aligned with the company’s best interests, it can lead to reputational risks for the company itself, as well as the other directors involved.

In the decision of Denton v Overstreet (CT01531ADJ2023) (1 February 2024), the Companies Tribunal took a decisive stand on the removal of a director as a result of a breach of their fiduciary duties towards the company.

The procedure to remove a director has not always been clear, as the courts, as well as the Companies Tribunal, have not been consistent in their application and interpretation of the legal principles governing a director’s removal. The decision of Denton v Overstreet (CT01531ADJ2023) (1 February 2024) (Denton case) provides some clarity, at last.

Companies Act: statutory removal of a Director

The provisions relating to the removal of a director have been codified in Sections 71(1), 71(2) and 71(3) of the Companies Act 71 of 2008 (Companies Act).

Prior to the Companies Act coming into force, a director’s duties were regulated in terms of the common law. The Companies Act codifies and extends the common law principles, in that Section 76 of the Companies Act provides for an increased standard of conduct expected from directors, compelling them to act honestly, in good faith, and in a manner which they reasonably believe to be in the best interests of, and for the benefit of, the company.

Directors are entrusted with a fiduciary duty to use their authority and perform their roles honestly, in the company’s best interests, and with the expected level of care, skill and diligence. In terms of Section 77(2)(a) of the Companies Act, should they fail to meet these obligations, a director may incur personal liability for any loss, damages or costs sustained by the company as a consequence of any breach of their fiduciary obligations, and it may be necessary to remove them from their position.

The Companies Act outlines procedures for the removal of directors by the board of directors of a company, the Shareholders of the company, and removal by an authorised judicial body. The board’s ability to remove a director is restricted to the ‘closed list’ of specific grounds, which include the director’s ineligibility, disqualification or incapacity, or neglect of their fiduciary duties. Conversely, the shareholders and the relevant authorised judicial bodies are not constrained by a ‘closed list’ of specific grounds for director removal under the Companies Act, and rather have an ‘open list’, which is in line with the basic corporate governance principles that directors are appointed at the discretion of the shareholders.

Removal in terms of sections 71(1) and 71(2): procedural importance

Section 71(1) of the Companies Act provides that “a director shall be removed by an ordinary resolution adopted at a shareholders meeting by the persons entitled to exercise voting rights in the election of that director”. The judiciary and the Companies Tribunal have long since emphasised the importance of following the correct procedural steps to remove a director, which are as follows

• a shareholders’ meeting must be convened to vote on the director’s removal. Section 61(3) of the Companies Act provides that the board can convene a shareholders’ meeting if a formal request is submitted to the company. Should the board neglect its obligation to call a meeting, the shareholders’ recourse is to petition a court, under Section 61(12) of the Companies Act, to compel the board of the company to schedule the meeting;

• it is mandatory to notify the director concerned of the proposed shareholders’ meeting and provide them with the proposed resolution for their removal. The period of notice should match the one that a shareholder is entitled to when a shareholders’ meeting is called. The shareholders may not vote on the resolution to remove the director unless such director was notified of the shareholder meeting;

• the reasons for the director’s removal must be provided to the affected director in sufficient detail; and

• the director must be afforded the reasonable opportunity to make representations on their impending removal.

Any deviation or failure to apply the Companies Act’s procedures could result in the review and potential reversal of the director’s removal by the authorised judicial body.

Removal in terms of section 71(3): procedural importance

The board and shareholders have the power to dismiss a director, only if there are at least three directors in the company. As seen in the Denton case, where a company has fewer than three directors, the board cannot remove a director; instead, the removal procedure must be facilitated by the Companies Tribunal.

In the Denton case, the Companies Tribunal sanctioned the director’s removal in terms of Section 71(3) because the director concerned was found to not have acted in the company’s best interests. The director concerned was removed, in terms of Section 71(3), as the Companies Tribunal found that the director’s non-deliverance of promised funding to the company, post utilisation of the company’s services and connections, jeopardised its financial well-being and thus amounted to a breach of the concerned director’s fiduciary duties towards the company. Therefore, it is imperative for directors to meticulously follow and align their actions with the provisions of the Companies Act, in order for their actions not to be construed as a breach of their fiduciary obligations towards the company, resulting in removal from the office of director.

Additional considerations

In following the procedure set out herein, to remove a director from office, certain additional considerations should be borne in mind, such as the following:

• Per the Companies Act, all director elections, appointments and removals are to be timeously filed with, and processed by, the Companies and Intellectual Property Commission.
• From a labour law perspective, if a director is also an employee of the company, removal of said director can involve certain nuances that should be considered in order to mitigate any claims against the company. A suitably qualified legal professional should be approached to facilitate the removal of a director, especially if it becomes apparent that there will be an intersection in the law that applies to the removal of a director.

Tessa Brewis is a Director, Jamie Oliver an Associate Designate, Deepesh Desai an Associate and Ashleigh Solomons a Candidate Attorney, Corporate & Commercial | Cliffe Dekker Hofmeyr.

This article first appeared in DealMakers, SA’s quarterly M&A publication.

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