CONSTRAINTS ON SHAREHOLDERS’ RIGHT TO REMOVE DIRECTORS AT STATE OWNED COMPANIES

Commercial & Corporate Law . 12 Mar 2017

We have recently witnessed various media reports pertaining to the removal of directors of state-owned companies (“SOCs”) at both public and municipal entities. It is in the public interest to clarify the procedures and constraints affecting the termination of directors’ employment at these entities.

All SOCs registered in terms of the Companies Act and listed in schedule 2 or 3 of the PFMA as well as municipal entities must comply with the provisions of the Companies Act. In terms of section 71 of the Companies Act, a director may be removed either by an ordinary resolution at a shareholders meeting (s71(1) and (2)) or by other board members (s71(3)).

In both instances, the director concerned must be given a notice of the meeting and be afforded reasonable opportunity to make a representation on the matter before a vote is taken. Unlike in the case of removal of a director by other Board members where issues can be determined objectively in terms of the criteria laid down in section 71(3) of the Companies Act, there are no specified grounds that can be relied upon by shareholders in order to remove a director. Directors serve at the pleasure of shareholders and consequently shareholders are entitled to effect removal of directors without any specific cause.

Whilst the Companies Act accords shareholders with a power to remove directors for undisclosed reasons, it has at the same time laid down the procedure to be followed before a director concerned is removed from office. Section 71(2) of the Companies Act demands that prior to a resolution for removal of a director being considered by the shareholders:

  • the affected director must be given notice of the meeting as well as the proposed resolution to have him or her removed, before a resolution is considered by    shareholders; and
  • the affected director must also be afforded a reasonable opportunity to make representations, either personally or through a representative to shareholders, prior to the resolution being considered and put to a vote.

The question is: how much detail should be contained in both the notice and resolution when a company contemplates removing a director. Section 62 of the Companies Act deals with notices of the shareholders’ meeting by, inter alia, providing that the company must deliver a notice of each shareholders’ meeting in the prescribed manner and form to all shareholders of the company regarding the date, time, general purpose of the meeting and the proposed resolution.

Section 65 (4) of the Companies Act prescribes the minimum contents of the proposed resolution. In particular, section 65(4) requires that a proposed resolution be expressed clearly and specific and be accompanied by sufficient information. Section 65(5) of the Companies Act grants specific remedies to any shareholder or a director who is of the opinion that the form of the proposed resolution does not satisfy the requirements of section 65(4) of the Companies Act. Section 65(5) refers to any shareholder or director (not only shareholders who are entitled to vote). Therefore, any shareholder or a director who believes that the proposed resolution is not clear or is not accompanied by sufficient information may apply to court for an order restraining the company from putting the resolution to vote until the defect is remedied.

The test whether the information contained in a notice is sufficient was considered in the Canadian case of Garvie v Axmith [1962] OR 65; 31 DLR (2d) 65 a decision of the Ontario High Court of Justice, where Spence J considered the test to be applied in determining the adequacy of a notice as follows:

The test on what must be contained in the notice has also been considered in Australia in a number of cases such as, Fraser v NRMA Holdings Ltd (1995) 127 ALR 543, where the Court after referring to a number of cases in England, Ireland and Canada held:

In Pretorius and Another v PB Meat (Pty) Ltd (1057/2013) at para 9 the Court held that “sufficient specificity” would mean “sufficiently detailed reasons to mount a response”.

A director concerned must also in terms of section 71(2) be given a reasonable opportunity to make a presentation personally or through a representative at the meeting before a resolution is voted upon. The purpose of this representation is to prevent a director from being removed on an impulsive vote and without having had an opportunity to state his or her case. A director can use the opportunity afforded to him or her in order to influence the outcome of the shareholders’ meeting.

The question is whether a shareholder of an SOC is required to be rational and show a good cause for his or her decision to remove a director in the exercise of his or her executive power. A decision to remove a director is not an administrative action, therefore it cannot be challenged on the basis of rationality under the Promotion of Administrative Justice Act (“PAJA”). This was confirmed in Minister of Defence and Military Veterans v Motau and Others 2014 (8) BLCR 930 (CC), where Khampepe J, dealing with the Minister’s power to remove Amscor’s directors, held that:

“She does not have to satisfy a list of jurisdictional requirements before she can take the decision, or need to demonstrate that a particular ground such as incapacity or misconduct exists. The Minister thus has a level of discretion in determining when directors should be removed, which points to the fact that her power under section 8(c) is executive in nature. The fact that the power is sourced in legislation is, as noted above, not in itself determinative, and thus does not dilute the force of the other considerations canvassed.”

The issue of showing good cause in removing a director, will depend on whether there is an enabling legislation that prescribes the grounds for removing a director in an SOC. In the .

However, where an enabling legislation requires substantive reasons before a director is removed, it is crucial for SOCs to comply with that enabling legislation and section 71(1) and (2) of the Companies Act. As a case in point, section 93G of the Municipal Systems Act (“MSA”) sets out the criteria for the removal of directors of municipal entities.

In order for a municipality to be able to remove a director of an SOC, both requirements of the MSA and the Companies Act must be satisfied. This principle was applied in the Motau case dealing with the Armscor Act where it was held that:

“… … … section 8(c) of the Armscor Act and section 71(1) and (2) of the Companies Act are perfectly compatible: the former provides the substantive criterion, and the latter the process, by which Board members may be dismissed. Section 71(1) and (2) does not put any substantive constraint on the exercise of the Minister’s dismissal power. Of course, it would be a different matter if the section obliged the Minister to dismiss a director for some other substantive reason (for example, ineligibility, incapacitation or negligence), notwithstanding the fact that she had good cause under the Armscor Act. But it makes no such provision. Put simply, section 71 is the procedure by which the Minister exercises her section 8(c) power. I see nothing undesirable or unduly constraining in that.”

There are, however, instances where the Companies Act does not apply to an entity owned by the state because such an entity is not incorporated in terms of the Companies Act. In such cases, the enabling legislation that creates that entity will be relied upon for both substantive and procedural requirements for the removal of such directors by the relevant Minister responsible for that entity.

As to whether the removal of a director by a shareholder, can be challenged, Section 65(6) of the Companies Act provides that once a resolution has been taken, it cannot be challenged in any forum on the grounds that it was not clear or did not provide sufficient information.

Though the Companies Act does not provide directors with a right to review the shareholders’ decision, the director concerned may still exercise various remedies that are available in law. Section 71 (9) of the Companies Act provides for the possibility of a director claiming damages for the loss of office due to his or her removal as a director. Under the common law, a director’s claim for damages for loss of office will only be successful if he or she was appointed on a fixed term contract.

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