The contested removal of a director from office by a resolution of the board
The decision of the Western Cape High Court in Pretorius v
PB Meat (Pty) Ltd [2013] ZAWCHC 89, in which judgment was
delivered on 14 June 2013, is the first High Court decision on the
interpretation of section 71 of the new Companies Act 71 of
2008.
This section governs the removal from office of directors.
Section 71(3) and (4) provide for the situation where, in a
company that has more than two directors, a shareholder or director
of the company alleges that a director has become ineligible or
disqualified to hold office as a director, or is incapacitated from
holding such office, or has neglected or been derelict in the
performance of his directorial functions.
Whether a person is ineligible to be a director or is
disqualified from being a director, as envisaged in this
provision, are issues that can be determined objectively in terms
of criteria laid down in the Act. By contrast, whether a person has
neglected his directorial duties or been derelict
in their performance may be far more difficult to establish, and
allegations in this regard may be made with ulterior and
self-serving motives.
Where such an allegation is made, the Act now requires that the
company's board of directors, other than the director in
question, is obliged to determine the issue by way of a board
resolution and the board is explicitly given the power to remove a
director whom it has determined to be so ineligible or
disqualified, incapacitated or negligent or derelict, as the case
may be.
The director is entitled to be furnished with a statement of
the reasons for his proposed removal, with reasonable
specificity
Section 71(4) – which was the focus of this particular
judgment – goes on to provide that –
"Before the board of a company may consider [such] a
resolution . . . the director concerned must be given –
(a) notice of the meeting, including a copy of the proposed
resolution and a statement setting out reasons for the resolution,
with sufficient specificity to reasonably permit the director to
prepare and present a response; and
(b) a reasonable opportunity to make a presentation, in person or
through a representative, to the meeting before the resolution is
put to a vote."
In this particular matter, the central issue for determination by the court was the interpretation of the requirement that, before the board considers such a resolution, the director in question must be given –
"a statement setting out reasons for the resolution, with sufficient specificity to reasonably permit the director to prepare and present a response".
By contrast, the now-repealed Companies Act of 1973 required
only that special notice be given to the director in question of
such a proposed resolution and that he had a right to be heard at
the meeting in question and was entitled to make written
representations to the company and to require that those
representations be notified to members of the company; see section
220(2) of that Act.
It needs to be borne in mind that the shareholders meeting has an
unfettered right to remove directors (even in the face of a
contract to the contrary; see section 71(1) of the Companies Act
2008) and that a decision in this regard by way of an ordinary
resolution cannot be challenged, for shareholders are not subject
to a fiduciary duty.
Indeed, this principle is the corner-stone of the concept of
corporate democracy that is the tacit underpinning of
company law systems that are based on English law, and this
cardinal principle is not overturned by the new Companies Act.
Section 73(3) will be triggered only where the aggrieved
shareholders do not have the voting power to pass a resolution at a
shareholders meeting for the removal of the director in question,
or where the impetus to remove a director comes from another member
of the board and not from the shareholders.
It is a novelty that the board of directors is now given the
power, in adjudicating on an allegation made by a shareholder or
director in this regard, to determine that the director in question
be removed from office, and the novelty in this regard is acute
where the allegation of misconduct has come from a member of the
board, and not from a shareholder.
It is likely that the decision in Pretorius v PB Meat (Pty)
Ltd will be the precursor of many forensic battles between
minority shareholders and directors, and between directors
inter se, for nothing is more common than a battle to
control a company through the power to determine who shall be its
directors.
Previously, this was a decision for the shareholders alone, with
directors being appointed by a resolution of the shareholders
meeting, and holding office until they resigned or were removed by
a similar resolution or by an order of court.
The director's right to request a statement of reasons for
the resolution
In this particular case, letters were served on two directors
which gave notice, on behalf of the company, that a board meeting
was being convened to consider a proposed resolution to remove them
from office on the basis that they had been derelict in the
performance of their duties.
The directors' attorney then delivered an eight page
"request for further particulars" in terms of section
71(4)(a), to which the company duly furnished a written reply. The
directors' response was that this reply fell short of what
would reasonably enable them to prepare a response for presentation
at the forthcoming board meeting.
The issue to be decided by the court was whether the tape
recordings and documents furnished by the company in response to
the directors' request for reasons (wrongly characterised by
their attorney as a request for "further particulars")
satisfied the sufficient specificity requirement in
section 71(4)(a) of the Act.
The background to the dispute
The background to this dispute was that the two directors in
question had, despite repeated requests, refused to resign as
directors, despite a provision to the contrary in their respective
service agreements.
In essence, the company's statement of reasons for the
proposed resolution to remove the directors in question was that,
acting in concert, they had unlawfully removed certain equipment
owned by the company from its premises in order to use it for
private purposes; that they had unlawfully disposed of such
equipment and retained the proceeds instead of paying them over to
the company. It was further alleged that the directors in question
had unlawfully appropriated cash belonging to the company and had
unlawfully made a personal profit that ought to have accrued to the
company.
There was no provision in the old Companies Act of 1973 for
reasons to be given
The difficulty facing the court was that the sufficient
specificity requirement in section 71(4)(a) of the Companies
Act 2008 has no comparable antecedent in the repealed Companies Act
of 1973, and the court thus had to determine its meaning de
novo.
Although the companies legislation of England and Australia
required that a director, whom the shareholders wished to remove
from office, had to be given notice of the proposed resolution, the
legislation of these countries did not go so far as requiring that
sufficiently detailed reasons had to accompany the notice;
little guidance could therefore be derived from these
jurisdictions.
The court accepted that the phrase sufficient specificity in this
context meant sufficiently detailed reasons to mount a
response and looked for guidance to the pre-dismissal
procedure required by the Labour Relations Act 66 of 1995 as laid
down in Avril Elizabeth Home for the Mentally Handicapped v
Commission for Conciliation, Mediation & Arbitration &
Others (2006) 27 ILJ 1644 (LC).
The grounds for the directors' application to
court
The directors based their application to court for relief on two
grounds; see para [19] and [22] of the judgment.
The first ground was that they were entitled to the requested
information in their capacity as directors of the company in that
they had a statutory obligation as directors to manage the company
in terms of section 66(1) of the Act and would be unable to do so
if they were refused access to the documents in question.
The court rejected this argument, pointing out (at paras [23] and
[27]) that, on their own versions, the directors in question wanted
to have sight of the documents, not in order to manage the company,
but for the sole purpose of preparing and presenting a response to
the allegations against them. The court also ruled (at para [28])
that the directors in question were not entitled as of right in
their capacity as such, to the documents in question.
The second ground relied on by the directors in question was that
they were entitled to the documents they had requested in terms of
section 50(1) of PAIA (the Promotion of Access to Information
Act).
The court pointed out, in this regard, that an applicant is not
required to establish a clear right worthy of protection, but is
merely (on the basis of the decision in Claase v Information
Officer, South African Airways (Pty) Ltd 2007 (5) SA 469
(SCA)) required to "put up facts which prima facie, though
open to some doubt, establish that he has a right which access to
the record is required to exercise or protect."
The court rejected the directors' arguments
Having considered the arguments pro and contra, the court
concluded (at para [44]) that the documents required by the
directors in question would not assist them in exercising or
protecting their rights as envisaged in section 50 of PAIA.
The court said (at para [45]) that what the directors were
seeking, in effect, was "to embark on a full-scale forensic
audit of the company" and that, far from bringing the dispute
to a short, sharp end, this was more likely to "escalate it
into a full-blown, costly, elaborate and lengthy exercise"
which was not what was envisaged in section 71(4)(a) of the
Companies Act 2008.
The court ruled (at para [46]) that the directors in question had
already been provided with sufficiently detailed reasons to mount a
response to the allegations against them.
The nub of the judgment
The major interest of the decision is that the court made clear
that it would not countenance a request for reasons, in terms of
section 71(4)(a), for a proposed resolution to remove a director
being turned into a full forensic audit of the company's
affairs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.