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December 4, 2018

Should reasons be given when shareholders remove a director?

Section 71 of the Companies Act (“the Act”) provides two options for removing a director. First, by an ordinary resolution adopted by the shareholders of the company; and second, by a resolution of board members, other than the director concerned.

If shareholders want to remove a director (the first option), must the director be informed of their reasons for doing so?

Section 71(1) of the Act states that a director may be removed from the board of directors by way of an ordinary resolution adopted at a meeting of shareholders by the persons entitled to exercise voting rights in an election of that director. The Act does not require, in this section or elsewhere, that a director must be furnished with the reasons or grounds for his or her removal. Section 71 of the Act applies despite any provision to the contrary contained in the company’s memorandum of incorporation or an agreement between the company and a director.

However, there are important notice provisions contained in section 71(2)(a) and (b) of the Act. In the case of Pretorius and Another v Timcke and Others 15479/14 2015 ZAWCHC (“the Pretorius case”) the court considered these notice provisions. Section 71(2) of the Act provides that the director concerned must be given notice of the meeting and must be afforded a reasonable opportunity to make a presentation, in person or through a representative, to the meeting, before the resolution to remove that director is put to a vote. The court focused on what constitutes proper “notice” of a resolution for removal and what constitutes a “reasonable opportunity” to make a presentation.

In the Pretorius case the shareholders sought to remove directors from the company and gave the directors notice of the intended resolution. Subsequently at the shareholders meeting the shareholders voted to remove the directors. However, the directors challenged the removal on the grounds that the notice was defective. The directors argued that the notice did not set out the grounds on which the shareholders proposed to remove them. The Western Cape High Court found that the removal of the directors was invalid, because the notice was defective and did not comply with section 71(2) of the Act.

The court held that the requirement that the director be afforded a “reasonable opportunity to make presentation” in terms of section 71 of the Act should be interpreted to mean that the shareholders are required to furnish the directors concerned in advance with reasons for the proposed removal. This will enable the directors to make proper presentation at the proposed meeting.

There was no appeal against this judgment and the decision by the Western Cape High Court is binding in the Western Cape. Therefore, shareholders should be cautious when considering the removal of a director and take note that a director is entitled to be furnished with reasons for his or her proposed removal.