Taking the Lead - Understanding Director Removal

In the fast-paced world of business, shareholders hold significant power to ensure that their companies are accountable. This authority extends to the important ability to hold directors responsible for their actions and, if necessary, to remove them from their positions on the board.

One of the key provisions in section 71 is section 65(3) of the Companies Act 71 of 2008, as amended (the “Act”). This section is a cornerstone in the process of director removal. It allows any two shareholders of a company to propose a resolution regarding matters on which they are entitled to vote. It is important to note that this proposal can only be made once a shareholders' meeting has been requisitioned under section 61(3) of the Act.

Section 61(3) states that the board must call a shareholders' meeting upon receiving written and signed demands from shareholders that outline the purpose of the proposed meeting.

The Foxvest Case: Setting a Precedent

A recent case, Foxvest Group (Pty) Ltd and Another v Rocky Park Holdings (Pty) Ltd and Others,[1] shed light on the intricacies of director removal under South African company law. In this case, the removal of a director, Mr. Blarney, was contested due to alleged fraudulent misconduct. The crux of the matter revolved around the interpretation and application of sections 65(3) and 61(3) of the Act.

The dispute arose when a shareholders’ meeting was requisitioned to remove Mr. Blarney from office. However, on the day of the meeting, neither the minority shareholder (the applicant) nor Mr. Blarney was present. Despite this, the majority shareholder (the respondent) proceeded to adopt a resolution to remove Mr. Blarney as director. The applicant contested this action, arguing that the resolution was invalid as it did not comply with the requirements of section 65(3) of the Act.

Legal Interpretation and Implications

The High Court ruling emphasised the importance of following the procedural requirements stated in the Companies Act. According to the ruling, a director can only be removed by an ordinary resolution that is proposed and supported by two shareholders in compliance with section 65(3) of the Companies Act. This decision reaffirms the significance of shareholder participation and the protection of minority shareholders' rights in corporate decision-making processes.

The judgment in the Foxvest case has significant implications for both business owners and directors. It highlights the importance of understanding and adhering to the procedural requirements outlined in the Companies Act when trying to remove a director. Additionally, it emphasises the crucial role of shareholders in ensuring corporate governance and accountability within their companies.

Conclusion

The ability of shareholders to hold directors accountable and, if needed, to remove them from their positions is a crucial aspect of corporate governance. The Foxvest case is a reminder to ensure compliance with these requirements when dealing with matters related to director removal. By adhering to the principles of transparency, accountability, and shareholder rights, businesses can promote trust, integrity, and long-term sustainability in their operations. In conclusion, it is essential to prioritise the protection of shareholder rights to maintain good corporate governance. Contact an expert at SchoemanLaw today.

[1] 2022/2807) [2023] ZAGPJHC 63 (27 January 2023)