We Cannot Direct the Wind, but We Can Adjust the Sails

Director removal under Section 71 of the Companies Act: Do shareholders need to give reasons for removing a director?

Until recently, there were two conflicting judgments as to whether reasons must be provided to a director prior to a director’s removal or not. The high court in the matter of Innocent Khathi – Mathonsi v Raesibe Gloria Tlokana & others (2023-134642) (2024) (“Mathonsi matter”) suggests that directors must be provided with reasons. We address the inconsistencies in how our courts have applied the law regarding the removal of directors by the shareholders.

Section 71(1) of the Companies Act 71 of 2008 (Companies Act) preserves the right of shareholders to remove directors from oﬃce by ordinary resolution of the general meeting of shareholders. The Companies Act expressly provides that this power of shareholders overrides any provision to the contrary in the memorandum of incorporation.

Section 71(2) describes the prescribed process that must be followed. It requires that before the shareholders of the company may consider the resolution for the removal of the concerned director –

the director must be given notice of the meeting and the resolution, at least equivalent to that which a shareholder is entitled to receive, irrespective of whether or not the director is a shareholder of the company; and
the director must be afforded a reasonable opportunity to make a presentation, in person or through a representative, to the meeting, before the resolution is put to a vote.

Courts’ approach to removal of directors by shareholders

The question that arises is whether shareholders need to provide reasons for the proposed removal of a director?

In the matter of Miller v Natmed Defence (Pty) Ltd , the High Court held that the shareholders of a company are not required to give reasons for their decision to remove a director.

Mr Miller had approached the court for an order to, amongst others, set aside the decision by the shareholder of Natmed Defence (Pty) Ltd to remove him as a director of the company.

Mr Miller alleged that the shareholder of the company had not complied with the requirement of section 71(2)(b) of the Companies Act, in that –

he (Miller) was not given any reasons as to why his removal was proposed, in order to enable him to make representations;

The court noted that sections 71(1) and 71(2) of the Companies Act do not contain language requiring the shareholders of a company to provide a director, proposed to be removed as a director, with a statement of reasons for the proposed resolution.

However, in an earlier decision, the Western Cape High Court, in the matter of Pretorius and Another v Timcke and Others , the court had reached a different conclusion. In that case, PB Meat (Pty) Ltd’s shareholders gave notice to two directors of their intention to remove them by way of a resolution without providing reasons.

The directors’ representative attended the shareholders’ meeting and requested the shareholders’ reasons for the proposed removal. The shareholders adopted the position that the directors were not entitled to reasons but stated that the shareholders no longer wanted the applicants to remain as directors. The shareholders proceeded to pass the resolution to remove the directors.

The directors challenged the shareholders’ decision. The court held that the shareholders’ notice was defective because of the failure to provide reasons for the proposed removal of the directors and consequently, the court set aside the resolutions taken by the shareholders.

Recently in the Mathonsi matter the court held that the decision of Pretorius & Another v Timcke & Another is correct in the interpretation of section 71(1) of the Companies Act. The court held further that the contentions that a meeting to remove a director can be called without the intervention of the board is misplaced. That it is also misplaced to suggest that shareholders may remove a director without regard to reasons, because directors serve at the pleasure of shareholders.

Conclusion

In conclusion, there are two decisions in support of provision of reasons to a director and one decision against provision. That said, it is necessary for a higher court to make a final binding ruling on the matter. It remains to be seen which judgment the Supreme Court of Appeal will confirm.