1. Introduction
When a director becomes disruptive, ineffective or no longer acts in the best interests of the company, shareholders and fellow directors may begin considering their removal. The Companies Act prescribes specific procedures that must be followed in such circumstances. Failure to comply with these procedures may render the removal invalid and expose the company to legal liability. This article provides an overview of the legal mechanisms available for the removal of a director.
2. Removal by Shareholder
2.1. In terms of section 71(1) shareholders are empowered to remove a director by adopting an ordinary resolution at a shareholders’ meeting, notwithstanding anything to the contrary in the company’s Memorandum of Incorporation (MOI) or any agreement between the company and the director or any agreement between the shareholders and the directors.
2.2. In terms of section 71 (2) – the director concerned must be given notice of the meeting at which the resolution for their removal will be considered. The director is entitled to make representations, either personally or through a representative, before the resolution is put to a vote.
3. Removal by the Board of Directors
3.1. Section 71(3) permits the board, in certain circumstances, to remove a fellow director where it determines that the director:
3.1.1. has become ineligible or disqualified;
3.1.2. is incapacitated and unlikely to recover within a reasonable period; or
3.1.3. has neglected or been derelict in the performance of their duties.
3.2. The director concerned must receive notice of the meeting and be given an opportunity to present their case before a decision is taken.
4. Removal by Court Order
In Kukama v Lobelo the court reaffirmed that directors may be held accountable should they fail to comply with their statutory duties. The court further confirmed that a court may declare a director delinquent or place a director under probation in terms of section 162 of the Companies Act and that such an order effectively results in the director’s removal from office.
5. Procedural Fairness Is Critical
5.1. The removal of a director is not merely a matter of voting. The Companies Act requires procedural fairness, including:
5.1.1. adequate notice of the proposed removal;
5.1.2. disclosure of the allegations or grounds relied upon;
5.1.3. an opportunity for the director to respond; and
5.1.4. compliance with the company’s MOI and the Companies Act.
5.2. Failure to follow these requirements may result in legal challenges and the setting aside of the removal decision.
6. Common Grounds for Director Removal
6.1. Although each case must be assessed on its own merits, common situations include:
6.1.1. breaches of fiduciary duties;
6.1.2. conflicts of interest;
6.1.3. failure to perform director responsibilities;
6.1.4. misconduct affecting the company;
6.1.5. incapacity or prolonged inability to fulfil the role; and
6.1.6. statutory disqualification.
7. Challenging a Removal Decision
7.1. The removal of a director under the Companies Act does not necessarily extinguish the director’s contractual rights.
7.2. A director who is removed from office may, depending on the circumstances, have a claim against the company for breach of contract if the removal results in a violation of a service agreement, employment contract or other contractual arrangement. Such claims arise under the common law and may include damages or compensation for loss suffered as a result of the breach.
7.3. In addition, where a director is removed by the board under section 71(3), section 71(5) entitles the director to apply to court to review the board’s determination.
8. Conclusion
8.1. Removing a director can have significant implications for a company’s governance, operations and shareholder relationships. Companies should ensure strict compliance with the Companies Act and obtain legal advice before initiating removal proceedings.
8.2. Professional guidance can help minimise disputes and ensure that any removal process is legally defensible. Should you have any related query, feel free to contact our offices for assistance.
By: Christopher Mathibela
[1] The Companies Act 71 of 2008.
[2] Davies et al Companies and other business structures in South Africa (2022) 72.
[3] Kukama v Lobelo and Others (38587/2011) [2012] ZAGPJHC 60 (12 April 2012).
[4] Gihwala and Others v Grancy Property Ltd and Others 2017 (2) SA 337 (SCA).
