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Hiring and Firing Directors: Be mindful of the traps

Section 66(1) of the Companies Act, No. 71 of 2008 (“the Act”) provides that the board of directors is responsible for the management of the business and affairs of a company. Section 66 further provides that at least 50% of directors of a profit company must be elected by the shareholders. The other 50% can be appointed by other procedures. These other procedures include ex officio directors or directors appointed by persons who have the right in terms of the company’s Memorandum of Incorporation to appoint directors.

Although the Act does not formally distinguish between executive and non-executive directors, there is a distinct difference between the two forms of directors. Executive directors are involved in the day-to-day management of the company and are usually employees of the company. They therefore have a dual role; on the one hand they hold the office of a director and on the other hand they also are employees entitled to protection under employment legislation. Non-executive directors, however, fulfil a supervisory role and do not have employment contracts with a company and can be appointed for a limited term.

Employees of companies are essentially, through delegated authority, appointed by the executive management. This implies that an executive director should also be appointed as employee by the executive management board. However, because an executive director also holds the office of director, he or she must be duly elected or appointed as such. For example, the executive director may be one of the 50% of the board who has been appointed by means other than election; i.e. by persons who have the right to do so in terms of the company’s Memorandum of Incorporation or are ex officio directors or may be one of the remaining 50% of directors elected by the shareholders.

A similar scenario would apply in the event of dismissal of a director. Because employment matters fall within the scope of management of the business of the company, employees are dismissed by the executive and the procedures of the relevant labour legislation should therefore be followed. The dismissal of executive directors therefore also must comply with the relevant employment law provisions. However, because an executive director holds the office of director in addition to being an employee, his or her dismissal from office should comply with section 71 of the Act, which deals with the removal of directors, either by the shareholders, or, in the event of alleged ineligibility, disqualification or dereliction of duty, by the board. The dismissal from employment does not necessarily imply that a director has been dismissed from office, hence dismissal by the shareholders or the board would generally speaking also be required. In terms of section 71 a director may be removed by an ordinary resolution of those shareholders who were entitled to elect that director.

Should you require any legal advice on the appointment or dismissal of a director, you may contact any of the commercial law team at Cluver Markotter Inc.