Removal of a Director under the Companies Act, 2008
Imagine you are a shareholder in a company with two directors. All that stands between you and an important sale of shares transaction is a resolution by the board authorising the transfer of the shares, but one director has disappeared. Despite sending him notices, he does not attend board meetings, written resolutions are similarly ignored, and he does not respond to correspondence. This scenario has been encountered all too often by clients who were left with no option but to consider removing the director, and the hindrance to the transaction. However, it is important to know in which circumstances a director may be removed and whether the provisions of the Companies Act, 2008 (Companies Act) or the client’s Memorandum of Incorporation (Memorandum) apply to such removal.
Statutory Removal Of A Director By Shareholders
The Companies Act requires that prior to a resolution for the removal of a director being considered by the shareholders, the director should be given notice of the meeting and the proposed resolution to have him removed. The notice period must be at least equivalent to that required for a shareholders meeting. In addition, the director should be given an opportunity to make representations to shareholders prior to the resolution being considered. Although the Companies Act does not expressly state that section 60 of the Companies Act, which permits shareholders to pass resolutions in writing as opposed to holding a meeting, does not apply to the removal of a director, it is advisable that a meeting be held.
Any provision in the Memorandum, the rules of the company, an agreement between the company and the director, or an agreement between any shareholders and a director which seeks to remove or restrict this statutory right of shareholders to remove a director cannot be used to invalidate the removal of a director in terms of the Companies Act. At best, the parties to such Memorandum, rules of the company, or agreement will have a claim for breach of contract, but may not prevent the removal of the affected director. Although affording the director a right to be heard, the Companies Act does not require that the shareholders have a reason to remove the director.
Statutory Removal Of A Director By The Board
The Companies Act provides for the removal of a director by the other directors on the board only in specific circumstances. In order to rely on those provisions of the Companies Act, the board must consist of at least three directors and a shareholder or director must allege that; the director has become ineligible or disqualified to act as a director in terms of the Companies Act; or the director has become incapacitated to the extent that the director is unable to perform the functions of a director and is unlikely to regain that capacity within a reasonable time; or the director has neglected or been derelict in the performance of the functions of a director.
The board must set out, in a notice to the director, the proposed resolution and a statement explaining why the resolution is being proposed in sufficient detail to enable the director to respond appropriately. Prior to consideration of the resolution, the affected director must also be afforded an opportunity to make a presentation to the board either in person or through a representative.
In the event that the board determines that the director is indeed ineligible or disqualified, incapacitated or has been negligent or derelict, the director, or person appointing him may apply to court to set aside the resolution. Where the directors have determined that the director is not ineligible or disqualified, incapacitated or has been negligent or derelict, any shareholder or director who voted differently in the resolution may approach the court to remove the director.
Removal Of A Director In Accordance With The Memorandum
A company may in its Memorandum provide mechanisms to remove its directors which are separate from those set out in the Companies Act. Such provisions typically state that a director may be removed either by the board; the shareholders; a particular shareholder; or shareholders holding a certain percentage of the voting rights in the company.
The Memorandum may also set out the manner in which the director is to be removed, for instance, on notice to the company or by resolution.
The shareholder whose sale of shares transactions were put on hold until the errant director was removed certainly did not wish to incur further delays and expenses in calling and holding a shareholders’ meeting at which the director will either be absent or will attend in order to exasperate the company further. It is therefore important that each company reviews its Memorandum and to the extent that it does not provide a mechanism to remove its director, the Memorandum should be amended.
This article is republished with permission from Bowman Gilfillan, article by Bontle Pilane.
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