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NOTES 33
YOU’RE FIRED! THE REMOVAL OF DIRECTORS UNDER
THE COMPANIES ACT 71 OF 2008
CAROLINE B NCUBE*
Senior Lecturer, Faculty of Law, University of Cape Town
‘Given the central role of delegated management in the corporate form, it is no
surprise that appointment rights — the power to select or remove directors (or
other managers) — are key strategies for controlling the enterprise. Indeed,
these strategies are at the very core of corporate governance.’ (Henry Hans-
mann & Reinier Kraakman ‘Agency problems and legal strategies’ in Reinier
Kraakman, Paul Davies, Henry Hansmann, Gerard Hertig, Klaus Hopt, Hideki
Kanda & Edward Rock (eds) The Anatomy of Corporate Law: A Comparative and
Functional Approach (2004) 26.)

I INTRODUCTION
It has been noted in the Australian context that the removal of directors is a
‘sleeper topic’ about which little is written (James McConvil ‘Removal of
directors of public companies takes centre stage in Australia: an exploration
of the corporate law and governance issues’ (2005) 1 Corporate Governance LR
191 at 192; Jean J du Plessis & James McConvil ‘Removal of company
directors in a climate of corporate collapses’ (2003) 31 Australian Business LR
251 at 251). The same situation prevails in South Africa, where only a few
papers have been written on the topic (See, for example, M P Larkin
‘Distinctions and differences: a company lawyer looks at executive dismissals‘
(1986) 7 ILJ 248; J J du Plessis ‘Besondere oorwegings van toepassing op die
ontslag van besturende direkteure’ (1991) 2 JJS/TRW 1, I Esser ‘Company
law and the spoliated director : Greaves v Barnard’ (2008) 20 SA Merc LJ 135,
John F Olson ‘South Africa moves to a global model of corporate governance
but with important national variations’ 2010 Acta Juridica 219 at 237–9). This
note seeks to address this deficit by examining the provisions relating to the
removal of directors in the new Companies Act 71 of 2008 (the 2008 Act) as
the removal of directors is an important corporate governance tool.
The note is divided into four parts. Following on from this introduction
(part I), the next part (part II) focuses on the statutory removal of directors
and as such, removals at common law are beyond its scope. It begins with an
outline of the removal of directors in terms of s 220 of the Companies Act 61
of 1973 (the 1973 Act) then proceeds to discuss the position under the 2008
Act. The discussion of removal of directors includes an overview of the
grounds and the procedural requirements for removal. It also incorporates a
brief overview of the provision for court orders for the disqualification of
persons from being directors, as these are, in effect, removals from office. The
third part (part III) outlines the remedies available to a director who is
removed from office both under the common law and statute. Part IV
concludes the note.

* I am indebted to Professor Robert Williams and Carias Chokuda for their

invaluable comments on earlier drafts of this note. The usual disclaimer applies.
34 THE SOUTH AFRICAN LAW JOURNAL

This note compares South African companies legislation to English,

United States of America (the US), Australian and Canadian companies
legislation. New Zealand companies legislation will not be considered as its
provisions relating to the removal of directors are markedly different from
these jurisdictions. For instance, s 105(1) of the New Zealand Companies
Act, 1993 makes shareholder removals subject to the company’s constitution
whilst, as will be shown below, the jurisdictions considered in this note do
not.

II REMOVAL OF DIRECTORS
It is important from the outset to emphasise that the new statutory provisions
entail two fundamental changes to the removal of directors. First, under s 220
of the 1973 Act, an ordinary resolution of the shareholders in a general
meeting suffices to remove any director, whereas under the 2008 Act
shareholders can remove only directors who have been elected to the board.
Ex-officio directors and directors who have been appointed to the board in
terms of the memorandum of incorporation cannot be removed by share-
holders. This significantly dilutes ‘the shareholders’ franchise’ to exercise
control over a company through removal of directors (for a general
discussion of this franchise see Lucian A Bebchuk ‘The myth of the
shareholder franchise’ (2007) 93 Virginia LR 675; John F Olson ‘Professor
Bebchuk’s brave new world: A reply to the myth of the shareholder franchise’
(2007) 93 Virginia LR 773). Secondly, two new modes of removal have been
introduced, namely removals at the instance of the board, and removals by
the Companies Tribunal (hereafter ‘the Tribunal’). In addition to its impact
on shareholders, the introduction of these two new modes of removal affects
directors who are also majority shareholders. Under the 1973 Act a director
who held a majority of shareholders’ votes was ‘untouchable’, as he could
defeat any resolution for his removal. However, under the 2008 Act such a
director can nevertheless be removed by a board resolution or a Tribunal
decision. This has important ramifications for family-controlled companies.

(a) The position under the 1973 Act

To provide some comparative background, this part of the note outlines the
position under s 220 of the 1973 Act. Section 220 is similar to ss 168 and 169
of the English Companies Act, 2006 and its predecessor, s 303 of the
Companies Act, 1985. Both the English and South African provisions
provide that shareholders in a general meeting can remove directors by
ordinary resolution provided that special notice is given of the removal and
the director concerned is afforded an opportunity to make representations at
the meeting at which the resolution is put to the vote. This mode of removal
is available despite any provisions to the contrary in an agreement between
the company and the director concerned.
Section 220(1) of the 1973 Act extends the power of shareholders to
remove directors by making such removals possible despite any provisions to
NOTES 35
the contrary in the company’s memorandum or articles of association.
Therefore any clauses in a company’s constitution attempting to protect the
director from removal, such as appointing him for life or providing that he
can only be removed by special resolution, are ineffective against this mode
of removal. However, the removal of a director does not derogate from his
right to claim damages for breach of contract (H S Cilliers, M L Benade,
J J Henning et al Cillers & Benade Corporate Law 3 ed (2000) para 9.29
(hereafter Cilliers & Benade); M S Blackman, R D Jooste, G K Everingham,
M Larkin, C H Rademeyer, J L Yeats Commentary on the Companies Act vol 1
(Revision Service 2007) 8-285 (hereafter Commentary)). Clearly the 1973 Act
contemplates that shareholders have an unrestricted right to remove any
director from office under this section.
However, it is possible by way of a shareholders’ agreement to exclude this
mode of removal. The courts have held that a shareholders’ agreement
precluding the removal of a director in terms of s 220 is both valid and
enforceable (Jennifer A Kunst, Piet Delport & Quintus Vorster (eds)
Henochsberg on the Companies Act 5 ed vol 1 (Issue 24) 422(2)–423 (hereafter
Henochsberg); Commentary 8-282 ; Stewart v Schwab 1956 (4) SA 791 (T); Desai
v Greyridge Investments (Pty) Ltd 1974 (1) SA 509 (A) at 518; Swerdlow v Cohen
1977 (3) SA 1050 (T) at 1057; Amoils v Fuel Transport (Pty) Ltd 1978 (4) SA
343 (W) at 347 and Barlows Manufacturing Co Ltd v RN Barrie (Pty) Ltd 1990
(4) SA 608 (C) at 611–12). These shareholders’ agreements may take various
forms, such as pool agreements or general agreements that relate to a number
of issues including directors’ appointments and removals (for an example of
such general agreements see Amoils v Fuel Transport (Pty) Ltd (supra) at 344).
Section 186(1) of the 1973 Act provides that unless the company’s articles
provide for a longer notice period, members must be given fourteen clear
days’ notice of the meeting at which the ordinary resolution for removal of a
director is to be voted upon. In addition, 28 days’ special notice of intention
to remove the director is to be given to the company (Cilliers & Benade para
9.30; s 220(2) read with s 186(3)). Similar notice provisions are contained in
the English and Australian legislation (s 169(1) of the (English) Companies
Act, 2006 and s 203D(2) of the (Australian) Corporations Act, 2001). The
company, in turn, is required to forward a copy of this notice to the director
whose removal is to be sought. The director is thus in a position to prepare
representations which may be made orally at the relevant general meeting.
The director’s statutory right to address the meeting means that a sharehold-
ers’ meeting must be called, thereby excluding the possibility of passing the
resolution by unanimous consent. Section 220(3) provides that directors may
also prepare written responses which, if received timeously, are of reasonable
length and are not defamatory, must be circulated to the shareholders prior to
the meeting. Similar provisions are contained in the English and Australian
legislation (s 169(3) of the (English) Companies Act, 2006; s 203D(4)(a) and
s 203D(5)–(6) of the (Australian) Companies Act, 2001). These provisions
enable directors to present arguments against their removal. This process also
affords the shareholders an opportunity to consider the director’s response in
36 THE SOUTH AFRICAN LAW JOURNAL

advance of the meeting. If there was no right to make such written

representations, then in circumstances where the meeting becomes heated or
unruly, a director may not be able to make his case as clearly, and nor would
shareholders be able to consider the director’s response properly.
Although s 220 of the 1973 Act entrenches the fundamental right of
shareholders to remove directors, a company can also make comprehensive
provisions for the removal of directors in its articles, since s 220(7) of the
1973 Act provides that ‘nothing in this section shall be construed as
derogating from any power to remove a director which may exist apart from
this section’. For example, the articles could provide that a director can be
removed without being given special notice or without the right to address
the shareholders’ meeting (Cilliers & Benade para 9.32; Commentary 8-284).
In addition to the removal of directors under s 220 of the 1973 Act, it is
also possible to remove a director by obtaining a court order for that
director’s disqualification in terms of s 219 of that Act (Cilliers & Benade paras
9.25–9.28; Henochsberg 418–20; Commentary 8-278). Under s 219 of the 1973
Act a court may disqualify a director in the following circumstances:
‘(a) when such a . . . director has been convicted of an offence in connection
with the promotion, formation or management of a company; or
(b) the Court has made an order for the winding-up of a company and the
Master has made a report under this Act stating that in his opinion a fraud
has been committed —
...
(ii) by any director or officer of the company in relation to the company
since its formation; or
(c) in the course of the winding-up or judicial management of a company it
appears that any such person —
(i) has been guilty of an offence referred to in section 424, whether or
not he has been convicted of that offence; or
(ii) has otherwise been guilty while an officer of the company of any
fraud in relation to the company or of any breach of his duty to the
company; or
(d) a declaration has been made in respect of any person under section 424(1).’
There is however, no reported case law and it appears that s 219 ‘is in
disuse’ (Cilliers & Benade para 9.28). Neither Henochsberg (at 420–22) nor the
Commentary (at 8-278–8-281) cite any South African case law on the section.

(b) The position under the 2008 Act

It is clear that this Act drew its inspiration from a number of jurisdictions,
particularly Canada, Australia and the US. However, given the absence of a
detailed explanatory memorandum, there is no official confirmation of the
inspiration for its provisions. It would have been useful to have been
informed of the source of provisions in order to know where to seek relevant
case law and academic texts that may be useful in interpreting the legislation,
as envisaged by s 5(2) of the Act which provides: ‘To the extent appropriate, a
court interpreting or applying this Act may consider foreign company law.’
NOTES 37
The 2008 Act contains two sections in terms of which a director may be
removed. Section 137(5) provides that a director of a company that is in the
process of business rescue may be removed, on application to a court, by the
business rescue practitioner for failure to comply with the requirements of
chapter 6 of the Act or for impeding the business recue practitioner in the
performance of his duties. There are no provisions relating to the procedural
aspects of such an application, and these will therefore be regulated by the
rules of court. Section 71 contemplates three modes of removing directors,
namely by ordinary resolution of the shareholders in a general meeting, by
board resolution, and by the Tribunal. The mode of removal is dependent on
the type of director whose removal is being contemplated, the number of
directors on the relevant company’s board, and the grounds for removal.
The categorisation of directors is based on how they were appointed to the
board. The 2008 Act provides for three modes of appointing ‘subsequent’
directors. The word ‘subsequent’ is used in this context to distinguish these
directors from the first directors of a company who are the incorporators of
the company as envisaged in s 67(1) of the Act. First, s 66 (4)(a)(i) provides
for the direct appointment and removal of directors by the specific persons
who are given this power in the company’s memorandum of incorporation.
Secondly, s 66(4)(a)(ii) provides for ex officio directors who become direc-
tors of a company by virtue of holding some other office, title, designation or
similar status. Thirdly, s 68(1) retains the concept of shareholder appointment
of directors through elections. Section 66(4)(b) provides that a profit
company, other than a state-owned company, which utilises one or both of
the first two methods of appointment must provide for the election by
shareholders of at least 50 per cent of the directors, and 50 per cent of any
alternate directors. This ensures that at least half of the board is elected by
shareholders.
Directors who have been appointed to the board by specific persons can be
removed only by those persons, the board or the Tribunal (s 66(4)(a)(i)).
Shareholder-appointed directors can be removed by any of the three modes;
that is to say, by the shareholders, the board or the Tribunal. Ex officio
directors can be removed only by the board or the Tribunal. Section 71(8)
provides that Tribunal removals are available only where the board consists of
‘less than three members’, whilst s 71(3) provides that board removals are
available only where the board has more than two members. Each of these
types of removals is considered in turn below.

(i) Shareholder removal of elected directors

Section 71(1) provides as follows:
‘Despite anything to the contrary in a company’s memorandum of incorpora-
tion or rules, or any agreement between the company and a director, or between
any shareholders and a director, a director may be removed by an ordinary
resolution adopted at a shareholders meeting by the persons entitled to exercise
voting rights in an election of that director subject to subsection (2).’ (Emphasis
supplied.)
38 THE SOUTH AFRICAN LAW JOURNAL

Generally, companies can increase the percentages required to pass

ordinary resolutions under the 2008 Act, but this cannot be done for ordinary
resolutions for the removal of a director (see s 65(7)–(8)).
Whilst s 71(1) of the 2008 Act is similar to s 220(1) of the 1973 Act, there
are two differences. First, s 71(1) of the 2008 Act refers to any agreement
between any shareholders and a director and renders such agreements
incapable of precluding removal from office by ordinary resolution. Such
agreements are not mentioned in s 220(1)(a) of the 1973 Act which provides:
‘A company may, notwithstanding anything in its memorandum or articles or
in any agreement between it and any director, by resolution remove a director
before the expiration of his period of office.’
However, agreements between shareholders and directors are mentioned
in s 203D(1) of the Australian Corporations Act, 2001 which may be the
source of the provisions in the 2008 Act. Section 203D of the Australian
Corporations Act provides that:
‘A public company may by resolution remove a director from office despite
anything in:
(a) the company’s constitution (if any); or
(b) an agreement between the company and the director; or
(c) an agreement between any or all members of the company and the
director.’
Both s 220 of the 1973 Act and s 71(1) of the 2008 Act do not list
shareholders’ agreements as one of the documents that cannot alter the
consequences of the section. Therefore, it is possible to preclude removals by
shareholders under s 71 through the use of shareholders’ agreements that
constrain voting in favour of a director’s removal. The use of shareholders’
agreements to thwart a shareholders’ removal is unlikely to be subject to s 6 of
the 2008 Act which provides:
‘(1) A court, on application by the Commission or Panel, may declare any
agreement, transaction, arrangement, resolution or provision of a company’s
Memorandum of Incorporation or rules —
(a) to be primarily or substantially intended to defeat or reduce the effect of a prohibition
or requirement established by or in terms of an unalterable provision of this Act;
and
(b) void to the extent that it defeats or reduces the effect of a prohibition or requirement
established by or in terms of an unalterable provision of this Act.’
(Emphasis supplied.)
In terms of this section agreements will be declared void by a court if they
are intended to defeat or minimise the effect of an unalterable prohibition or
requirement. Section 71(1) does not contain an unalterable prohibition or
requirement and therefore s 6 does not apply to such shareholders’ agree-
ments.
The second difference between the 1973 and 2008 Acts is that s 71(1) of
the 2008 Act restricts the shareholders’ power to remove directors by
ordinary resolution to elected directors. This provision is similar to § 8.08 (b)
NOTES 39
of the Model Business Corporation Act which provides that ‘if a director is
elected by a voting group of shareholders, only the shareholders of that
voting group may participate in the vote to remove him’. It is also similar to
s 109(2) of the Canada Business Corporations Act, 1985 which provides:
‘Where the holders of any class or series of shares of a corporation have an
exclusive right to elect one or more directors, a director so elected may only be
removed by an ordinary resolution at a meeting of the shareholders of that class
or series’.
The significance of these restrictions in s 71(1) of the 2008 Act is that
shareholders cannot remove an ex-officio or directly appointed director
from office and will have to rely on the board or the Tribunal to effect the
removal. No grounds for removal are provided for with respect to removals
by shareholders. This is because ‘directors serve at the pleasure of share-
holders’ and consequently shareholders may effect removals without cause
(John E Moye The Law of Business Organisations (2004) 166).
Procedural requirements
Section 220 (2) of the 1973 Act and s 71(2) of the 2008 Act provide that
notice of the meeting at which a resolution for the removal of a director must
be given to the director whose removal is sought. Thereafter, the director
concerned must be afforded an opportunity to make representations (in
person or through a representative) to the general meeting before a decision
on the removal is made. Under the 1973 Act, 28 days’ special notice is to be
given (s 220(2) read with s 186 (3)). Under the 2008 Act the director is to be
given notice ‘at least equivalent to that which a shareholder is entitled to
receive’ even if that director is not a shareholder (s 71(2)(a)). In a public or
non-profit company, the notice period will be 15 business days and in any
other company the notice period is 10 business days (s 62(1)).
South Africa’s 1973 Act, and the English and Australian companies
legislation provide for the possibility of the making and circulating written
representations to shareholders prior to the meeting. By contrast, the 2008
Act does not expressly provide for written representations or their circula-
tion. This does not prevent the director concerned from preparing a written
response, submitting it to the company, and requesting its circulation to
shareholders or the board prior to the meeting. However, the company may
refuse such a request. The provisions pertaining to written representations
that are outlined above should have been carried forward into the 2008 Act
and been made applicable to all types of removals in view of the benefits that
they afford to directors.

(ii) Removal by the board

Removals at the instance of the board are neither provided for under the
1973 Act, nor in the English and Canadian companies legislation. Section
203E of the Australian Corporations Act, 2001 prohibits board removals in
public companies, although they are possible in proprietary companies
where they have been provided for by the company’s constitution (Stephen
40 THE SOUTH AFRICAN LAW JOURNAL

Knight ‘The removal of public company directors in Australia: time for

change?’ (2007) C&S LJ 351 at 353). The prohibition of board removals in
public companies has been strongly criticised as being disadvantageous to
shareholders (Knight op cit at 357–62; McConvill op cit at 198). The 2008
Act is therefore an improvement on the Australian companies’ legislation
since it provides for removals by the board for all types of companies.
Section 71(3) of the 2008 Act provides:
‘If a company has more than two directors, and a shareholder or director has
alleged that a director of the company —
(a) has become —
(i) ineligible or disqualified in terms of section 69, other than on the
grounds contemplated in section 69(8)(a); or
(ii) 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
(b) has neglected, or been derelict in the performance of, the functions of
director, the board, other than the director concerned, must determine the
matter by resolution, and may remove a director whom it has determined to be
ineligible or disqualified, incapacitated, or negligent or derelict, as the case
may be.’ (Emphasis supplied.)
Whilst the removal proceedings are initiated on the basis of allegations, a
director will be dismissed only if the allegations are substantiated to the
board’s satisfaction. The availability of an appeal against and a review of a
board’s decision on the removal of a director are discussed below under
‘Remedies’. Directors who are subjected to frivolous dismissal proceedings
based on unfounded or unreasonable allegations may have remedies under
the common law for defamation. Each of the grounds for the removal of a
director is briefly discussed below.

Ineligibility or disqualification
The underlying premise of this ground for removal is that, at the time of
appointment, the director whose removal is now being sought was both
eligible and qualified for appointment. However, subsequent adverse
changes to that director’s circumstances necessitate the initiation of removal
proceedings. Section 71(3)(a)(i) provides that removal proceedings have to
be initiated where there is an allegation that the director concerned has
become ‘ineligible or disqualified in terms of section 69, other than on the
grounds contemplated in section 69(8)(a)’ (emphasis supplied). In terms of
s 69(8)(a) , the grounds for disqualification are a court order prohibiting a
person from being a director or declaring a person to be delinquent under
s 162 of the 2008 Act or s 47 of the Close Corporations Act 69 of 1984.
Therefore, it seems that if a director becomes ineligible or disqualified on any
other ground, formal removal proceedings have to be instituted.
The requirements under s 71(3)(a)(i) that formal removal proceedings
have to be carried out is at odds with s 69(4), which provides for the
automatic loss of directorship upon subsequent ineligibility or disqualifica-
NOTES 41
tion as follows: ‘A person who becomes ineligible or disqualified while
serving as a director of a company ceases to be a director immediately, subject
to section 70(2)’. Section 70(2) provides that such automatic loss of office is
subject to the proviso that a vacancy on the board will not arise until the
expiry of the time for filing an application for review or the granting of an
order by the court on such an application. Clause 43 of the Companies
Amendment Bill (B40–2010) seeks to reform s 69(4) as follows: ‘A person
who becomes ineligible or disqualified while serving as a director of a
company ceases to be entitled to continue to act as a director immediately,
subject to section 70(2).’ It is submitted that such an amendment, if enacted,
would not change the current substantive position under s 69(4), namely that
a director who becomes ineligible or disqualified must cease his activities as
director immediately.
Furthermore, s 71(3)(a)(i) contradicts s 69(2)(b), which provides that a person
who is disqualified or ineligible must not act as a director. In the absence of a
detailed explanatory memorandum, it is not clear why s 71(3)(a)(i) requires the
formal removal of a director who has become ineligible or disqualified on
grounds other than those provided for by s 69(8)(a). In order to seek possible
reasons for this requirement, it is necessary to consider these grounds of
ineligibility and disqualification.
These grounds are found in s 69(7) and s 69(8)(b). Section 69(7) provides
that juristic persons, unemancipated minors and persons who do not meet a
company’s qualification criteria as provided for in the company’s memoran-
dum are ineligible for appointment as directors. It is worth noting that the
first ground of ineligibility would bar the appointment of a juristic person in
the first place, and removal therefore becomes unnecessary.
An emancipated minor who has been appointed as director could lose his
emanicipated status and therefore would be required to relinquish his
directorship. It could be that formal removal is required in this instance, as
the director concerned may wish to contest the allegation that he has lost his
emancipation. The removal proceedings would afford him the opportunity
to counter the allegation. However, as noted in Dennis Davis, Farouk
Cassim, Walter D Geach & Tshepo Mongalo (eds) Companies and other
Business Structures in South Africa (2009) 87, relying on Ex parte Velkes 1963 (3)
SA 584 (C) it is doubtful whether an emancipated minor would qualify to be
appointed a director in the first place (see also Henochsberg 414 and
Commentary 8-270–1).
A person who initially qualified for appointment as a director of a
company could conceivably lose the relevant qualification. For example,
postulate that company A’s memorandum of incorporation provides that only
persons who are registered members of a specified professional association are
qualified to be appointed as directors. Mr B, who is so registered, is appointed
as director of company A. If however, Mr B’s registration thereafter lapses or
is revoked, he becomes ineligible to be a director of company A. Mr B will
then have to be removed from office. Removal may have been required by
the Act as the loss of a qualification in this manner is a factual matter which
must be proven before a director loses his or her office.
42 THE SOUTH AFRICAN LAW JOURNAL

Section 69(8)(b) provides that directors become disqualified if they are

declared insolvent and are unrehabilitated, are prohibited from holding
directorships by any public regulation, are removed from an office of trust for
dishonesty, or are convicted in South Africa or elsewhere and imprisoned
without the option of fine or fined more than a prescribed amount for
specified offences. Formal removal proceedings would afford the director an
opportunity to prove that he is not disqualified as alleged. However, as these
are largely matters of fact, it is unlikely that a director would attempt to
contest such ineligibility or disqualification once the ground has been
established. For example, if a shareholder is able to produce proof of a
relevant conviction that has not been overturned on appeal, the director
concerned cannot successfully dispute the conviction.
Section 218(1) of the 1973 Act contains similar grounds for disqualifica-
tion but does not expressly require the formal removal of disqualified
directors. This section is understood to result in automatic loss of office of the
disqualified director (Henochsberg at 414). In addition it is an offence to serve
as a director whilst so disqualified (s 218(2)(a)) and such a director will be
‘jointly and severally liable for all debts of the company incurred by the
company for the period during which such person knew or could reasonably
be expected to know of the disqualification’ (s 218(2)(b)). It is therefore
submitted that s 71(3)(a) ought to have treated s 69(8)(b) in the same manner
as s 69(8)(a) by providing that it is not necessary to formally remove a director
who is disqualified from being a director by s 69(8)(b).

Inability to perform a director’s functions

Evidence will be required in order to substantiate a claim that a director is
incapacitated to the extent that he is unable to perform the functions of a
director, and is unlikely to regain that capacity within a reasonable time.
However, due to its vagueness, this ground is likely to be invoked
maliciously where conflicts arise between directors, shareholders and perhaps
even employees.

Negligence or dereliction of duties

This is likely to be a contested ground for removal as it is closely entwined
with a director’s liability to the company of which he is director for breach of
his duties. Further, the concept of ‘negligence of directors’ is particularly
difficult to define, and therefore may lend itself to unscrupulous use. A
finding of negligence or that the director is guilty of dereliction may lead to a
claim for damages against the director concerned, as well as an application to
have him placed under probation or declared delinquent under s 162.
Whether or not a director has been negligent or is guilty of dereliction of
duty will be determined in accordance with the criteria laid down in s 76 of
the Act, which codifies standards for directors’ conduct and in accordance
with the common law. A full discussion of the breach of directors’ duties and
of s 162 is beyond the scope of this note. (For discussions of directors’ duties
under the 2008 Act see Natasha Bouwman ‘An appraisal of the modification
NOTES 43
of the director’s duty of care and skill’ (2009) 21 SA Merc LJ 509; Julie Cassidy
‘Models for reform: the directors’ duty of care in a modern commercial
world’ (2009) 20 Stellenbosch LR 373; and J S McLennan ‘Directors’ fiduciary
duties and the 2008 Companies Bill’ 2009 TSAR 184. For a discussion of
s 162 see Eric Levenstein ‘The delinquent director: company law’ 2010
(September) Without Prejudice 21.)

Procedural requirements
It is noteworthy that board removals can be initiated by a single director or
shareholder (Olson op cit at 238). This affords significant protection to
minority shareholders whose attempts to remove a director by ordinary
resolution may be thwarted by majority shareholders. A board that receives a
request from a shareholder or director to begin proceedings to remove a
director under s 71(3) cannot refuse to consider such a request. This is
because s 71(3) provides that, upon receipt of such a request the board ‘must
determine the matter by resolution’. Section 71(4) requires that such a
resolution must be considered at a meeting to which the director whose
removal is sought is invited and afforded an opportunity to respond as
detailed below. Therefore, even if the board is of the opinion that the request
is groundless, it is required to call a meeting in accordance with s 71(4).
Section 71(4) provides that a director whose removal is in issue must be
given notice of the meeting, plus a copy of the relevant resolution
accompanied by a statement of reasons for resolution which is detailed
enough to enable him to formulate a response. Whilst the English and
Australian companies legislation make provision for notice to be given to
directors they do not go as far as stating that sufficiently detailed reasons must
accompany the notice. In requiring this, the 2008 Act protects directors by
ensuring that they are in a position to mount a response to the case for their
removal. Where the director concerned is also an employee, these provisions
ensure the fairness of a hearing that may lead to a dismissal. In that sense, the
legislation also protects companies by requiring them to ensure fair hearings.
In contrast to the statutory procedures relating to a shareholder removal
discussed above, the notice period for removals by a board is not stipulated. It
is unclear why this is so. It would have been more consistent to provide for
the same notice periods for all types of removals. In the absence of such
provisions, the notice given to a director should be of reasonable length to
enable the director concerned to formulate a considered response to the
statement of reasons. This position is supported by s 73(4), which requires
that proper notice of board meetings, determined by a board in accordance
with a company’s memorandum of incorporation, must be given to direc-
tors. Finally, the courts have emphasised the need for meaningful notice of
board meetings to be given to directors (see for example SABC v Mpofu 2009
(4) All SA 169 (GSJ) paras 37–41). Therefore, in the interests of certainty and
in cognisance of statutory and case law requirements pertaining to notice of
board meetings, minimum notice periods for board meetings at which
removals are to be decided upon, ought to have been prescribed.
44 THE SOUTH AFRICAN LAW JOURNAL

The director whose removal is being sought must be given a reasonable

opportunity to make a presentation personally or through a representative at
the board meeting before the resolution for his removal is voted upon
(s 74(1)(b)). As was noted above, directors are not afforded the opportunity to
submit written responses for circulation to the board prior to the meeting.
After considering the merits of the resolution for removal and the relevant
director’s case against the removal, the board may decide that a removal is
appropriate. Section 71(3) provides that the board ‘may remove a director
whom it has determined to be ineligible or disqualified, incapacitated, or
negligent or derelict, as the case may be’ (emphasis supplied). On a literal
reading of this section the board may choose to retain a director it has found
to be incapacitated, negligent or who is guilty of dereliction of duty.
However, in reality the board would be hard pressed to find acceptable
justification for the retention of an incapacitated director or a director who
has been grossly negligent or derelict in the execution of his functions; it is
more likely that it will determine that a removal is required. In exercising its
discretion, the board could retain directors it has found to be negligent or
who are guilty of dereliction of duty to a minimal extent. The creation of
such discretion immediately raises concerns about improperly motivated
board decisions. However, these concerns ought to be allayed by the fact that
the members of board will be in breach of their own duties to the company if
they make a decision to remove or retain a director that is not reasonably
justifiable as being in the interests of the company.

(iii) Removal by the Tribunal

The purpose of s 71(8) seems to be the provision of an alternative mode of
removal for companies where removals by the board are unavailable. This is
evident from the restriction of removals by the Tribunal to companies that
have only one or two directors and the restriction of removals by the board to
companies that have at least three directors (s 71(8) and s 71(3) respectively).
In every other respect removals by the Tribunal are the same as removals by
the board. Sections 71(8)(b)–(c) provide that any shareholder or director may
apply to the Tribunal to make a determination whether a director should be
removed on the grounds listed in s 71(3). These are the same grounds on
which a removal by the board must be based. In addition, all the procedural
requirements and the rights to apply for a review that apply to removals by
the board are extended to removals by the Tribunal.
Removals by an enforcement or administrative agency are not unique to
South Africa. Canadian provincial securities legislation provides for the
removal of directors by securities commissions (Jassmine Girgis ‘Corporate
directors’ disqualification: the new Canadian regime?’ (2009) 46 Alberta LR
677 at 698–9; for example see s 127 of the Ontario Securities Act, 1990, s 198
of the Alberta Securities Act, 2000, and s 161 of the British Columbia
Securities Act, 1996). Similarly, s 206F of the Australian Corporations Act
gives the Australian Securities and Investments Commission (ASIC) powers
to disqualify a director for a maximum period of five years. Such a
NOTES 45
disqualification is, in effect, a removal from office. The grounds for such
disqualification are improper or illegal ‘conduct in relation to the manage-
ment, business or property of any corporation’ and ‘whether the disqualifica-
tion would be in the public interest’. The section also empowers the ASIC to
consider other factors, if it deems it to be appropriate.
In addition to such removals by administrative or enforcement bodies, the
United States and Canada also have judicial removals. In the United States
judicial removals are provided for by s 8.09 of the Model Business Corpora-
tions Act, which has been incorporated into the companies legislation of at
least thirty states (Olga N Sirodoeva-Paxson ‘Judicial removal of directors:
Denial of directors’ license to steal or shareholders’ freedom to vote?’
(1998–1999) 50 Hastings LJ 97). It is worth noting that the three jurisdictions
of Delaware, New York and California have all provided for judicial
removals (s 225(c) of the Delaware General Corporation Law Title 8, ch 1 of the
Delaware Code; s 304 of the California Corporations Code; and s 706(d) of
the New York Business Corporation Law). The essence of these statutory
provisions is that shareholders may apply directly to a court for the removal of
a director. Similarly Canadian companies’ legislation also provides for judicial
removal as part of the ‘oppression remedy’ (Girgis op cit at 679; s 241 of the
Canada Business Corporations Act, 1985). Under the Australian Corpora-
tions Act, 2001 there is no express provision for judicial removal of directors.
However ss 206C, 206D and 206E provide for judicial disqualifications of
directors which effectively remove the affected directors from office.
Section 71 of the 2008 Act does not provide for judicial removal at the first
instance without initial efforts to secure a removal by the board or Tribunal.
Rather, judicial removal is achieved through an application for the review of
a board or Tribunal decision. Reviews are discussed below. In addition,
indirect judicial removal of directors may be achieved through an application
to place a director under probation or to be declared a delinquent under
s 162. Under s 162(5) of the 2008 Act, a director will be declared a
delinquent in any of the following circumstances. These are, if the director:
1. consented to serve as a director, or acted as a director while ineligible or
disqualified to do so without court permission or in circumstances not
covered by s 69(12);
2. acted in contravention of an order of probation in terms of Companies
Act, 2008, or s 47 of the Close Corporations Act, 1984;
3. breached his directors duties;
4. has repeatedly been personally subject to a compliance notice or similar
enforcement mechanism, for substantially similar conduct, in terms of
any legislation;
5. has at least twice been personally convicted of an offence, or subjected
to an administrative fine or similar penalty, in terms of any legislation; or
6. within a period of five years, was a director of one or more companies
or managing member of one or more close corporations, or controlled
or participated in the control of a juristic person, irrespective whether
46 THE SOUTH AFRICAN LAW JOURNAL

concurrently, sequentially or at unrelated times, that were convicted of

an offence, or subjected to an administrative fine or similar penalty, in
terms of any legislation.
Section 162 (7) provides that a court may place a director under probation
if he
1. was present at a meeting and failed to vote against a resolution despite
the inability of the company to satisfy the solvency and liquidity test;
2. otherwise acted in a manner materially inconsistent with the duties of a
director;
3. acted in, or supported a decision of the company to act in, a manner that
is oppressive or unfairly prejudicial to a shareholder or director; or
4. within any period of 10 years of the coming into force of the 2008 Act
has been a director of more than one company, or a managing member
of more than one close corporation, which failed to fully pay all of its
creditors or meet all of its obligations in the absence of an approved
Business Rescue Plan or a compromise with creditors.

(iv) Review of board and Tribunal decisions

Section 71 provides for applications to court for a review of a board or
Tribunal decision pertaining to the removal of a director. A review is
available both where the board or Tribunal has decided to remove a director
(s 71(5) as read with s 71(8)(c)) and where a decision has been made to retain a
director (s 71(6) as read with s 71(8)(c)). Each of these scenarios is discussed in
turn below.

Review of a decision to remove a director

After a board or the Tribunal removes a director from office, that the director
or person who had directly appointed him to the board has 20 business days
to take the matter on review to court (s 71(5) as read with s 71(8)(c)). As
noted above, s 70(2) provides that a removal by the board does not create a
vacancy on the board until the later of the expiry of the time for filing an
application for review or the granting of an order by the court on such an
application. This provision is not extended to removals by the Tribunal. It is
submitted that such an extension ought to have been made for clarity and
consistency. However, even in the absence of such an extension, in practice it
would be imprudent for a company to attempt to appoint a replacement
director before the period for filing a review has expired. There is no
provision for the orders that may be handed down by a court pursuant to an
application for a review under s 71(5).

Review of a decision to retain a director

After a board or Tribunal decision to retain a director on the board, any
director who voted in favour of the resolution to remove the director
concerned, or any shareholder who has voting rights that are exercisable in
the election of that director, can take the matter to court on ‘review’
NOTES 47
(s 71(6)(a) as read with s 71(8)(c)). A review in its strict sense connotes an
enquiry into the procedural aspects of a decision whilst an appeal goes to the
merits of the matter though it is limited to the evidence adduced at the first
hearing of the matter (I Ellis & M Dendy ‘Civil procedure: High court’ in W
A Joubert (founding editor) The Law of South Africa volume 3(1) 2 ed (2007)
para 394). However, a close reading of s 71(6)(b) shows that what is intended
is not a review but an appeal. This section provides that
‘the court, on application in terms of paragraph (a), may —
(i) confirm the determination of the board; or
(ii) remove the director from office, if the court is satisfied that the director is
ineligible or disqualified, incapacitated, or has been negligent or derelict’ (emphasis
supplied).
Clearly, a court could only be ‘satisfied’ that the director is ineligible or
disqualified, incapacitated, or has been negligent or is guilty of dereliction of
duty, by considering the merits of the matter.
Where a matter is so taken on review, the court may either confirm or
reverse the board or Tribunal’s determination (s 71(6)(b) as read with
s 71(8)(c)). Where the court confirms the board’s determination the applicant
must bear the legal costs of the company and any other party (s 71(7)). A
similar provision is not extended to the confirmation of the Tribunal’s
decision.

III REMEDIES PURSUANT TO DISMISSAL

A director who is removed from office in terms of s 71 of the 2008 Act and
s 220 of the 1973 Act has several remedies. First, a director who has a fixed
term appointment but is removed from office by an ordinary resolution of
the shareholders before the expiry of that term, may have a claim for damages
against the company for breach of contract (Cilliers & Benade op cit para
9.31). Section 220(7) of the 1973 Act provides:
‘Nothing in this section shall be construed as depriving a person removed
thereunder of compensation or damages which may be payable to him in
respect of the termination of his appointment as director or of any appointment
terminating with that of director.’
Much in the same vein, s 71(9) of the 2008 Act provides:
‘Nothing in this section deprives a person removed from office as a director in
terms of this section of any right that person may have at common law or
otherwise to apply to a court for damages or other compensation for —
(a) loss of office as a director; or
(b) loss of any other office as a consequence of being removed as a director.’
Hence, both statutes provide for the possibility of a director claiming
damages for the loss of another office or appointment due to his removal as a
director. For example, under s 71(9)(b) a director who held ex-officio
directorships in any other company by virtue of his directorship in the
company from which he has been removed, can claim damages for loss of the
ex-officio directorships as well.
48 THE SOUTH AFRICAN LAW JOURNAL

Under the common law, a director’s claim for damages for loss of office
will only be successful if he was on a fixed term contract which has been
prematurely terminated and he has not given the company cause to terminate
the contract by reason of his breach of that contract (Commentary at 8-286;
Henochsberg at 422). This position is extended to statutory removals by
s 220(7) of the 1973 Act and s 71(9) of the 2008 Act. Where the director has
committed a breach, for which he is removed by the shareholders, board or
the Tribunal, he is not entitled to damages or compensation. Where there has
been no breach by the director, but the director has been removed
nonetheless by shareholders in terms of the Companies Acts of 1973 and
2008, such a director is entitled to damages. The quantum of damages
depends on whether there was an agreement between the company and
director for compensation for premature loss of office. Where such an
agreement has been concluded, it will determine the amount payable. Where
there was no such agreement, the director would have to prove his damages
(Henochsberg at 422). Such damages would consist of lost salaries and (where
applicable) commission, compensation for reductions in pensions and life
policy cover, and for insurance premiums which would have been paid by
the company for the director (Commentary at 8-285n7).
Secondly, the removal of a director who is also an employee and whose
employment is dependent on his directorship will constitute a dismissal qua
employee. This principle was recently confirmed in SA Post Office Ltd v
Mampeule [2009] 8 BLLR 792 (LC) para 28 where Ngalwana AJ, giving the
judgment of the court, said:
‘In my view any act by the employer which results, directly or indirectly, in the
termination of the employee’s contract of employment constitutes a dismissal
within the meaning of section 186(1)(a). That is why the LRA recognises the
concept of constructive dismissal (section 186(1)(e) of the LRA). I do not want
to be understood as saying what happened here constitutes constructive
dismissal. I am not saying that. The point I make is that a dismissal does not
come about only when the employer tells the employee ‘‘you’re fired’’. Thus,
when the Minister removed the respondent from the applicant’s board of
directors, thereby triggering an automatic and simultaneous termination of his
contract of employment with the applicant, she effectively dismissed him. With
that there can be no quarrel’.
(See also PG Group (Pty) Ltd v Mbambo NO & others [2005] 1 BLLR 71
(LC) para 22–25; Michael Beaumont ‘Executive directors — Are they
employees?’ (2005) 7(1) Beaumont Express 6 at 7–8; Michael Beaumont ‘Loss
of directorship — Does this amount to a dismissal?’ (2009) 11(9) Beaumont
Express 168; B P S van Eck and S Lombard ‘Dismissal of executive directors:
comparing principles of company law and labour law’ 2004 TSAR 20).
An executive director may resign from a directorship but still retain
employment by the company. A simultaneous termination of that director’s
employment would constitute a dismissal (See Amazwi Power Products (Pty)
Ltd v Turnbull [2008] 9 BLLR 817 (LAC), discussed in Michael Beaumont
‘Resignation as a director — Does this also end the employment
relationship?’ (2008) 10(10) Beaumont Express 190).
NOTES 49
A director who is so dismissed as a result of a removal or resignation from
the board is entitled to the protection afforded by the Labour Relations Act
66 of 1995. The procedural and substantive fairness of the dismissal will
depend on the facts of the matter. Generally, a substantively fair dismissal is
one based on a fair reason relating the employee’s conduct or capacity or the
employer’s operational requirements (D du Toit, D Woolfrey, D Bosch, S
Godfrey, J Rossouw, S Christie, C Cooper, G Giles & C Bosch Labour
Relations Law: A Comprehensive Guide 5 ed (2006) 394, for the current ‘own
opinion’ approach to evaluating fairness see Fidelity Cash Management Service v
CCMA & others [2008] 3 BLLR 197 (LAC) paras 93–5). In cases of unfair
dismissal, the most appropriate remedy is usually an award of damages as the
courts have stated that the remedy of reinstatement is unlikely to be granted
(PG Group (Pty) Ltd v Mbambo NO & others (supra) para 29).
Thirdly, the 2008 Act provides for reviews after successful or failed
removals as outlined above.

IV CONCLUSION
The 2008 Act has introduced a number of substantive and procedural
changes to the law relating to the removal of directors. It has two sets of
provisions relating to such removals. First, s 137(5) provides for a court
application for the removal of a director by a business rescue practitioner, for
non-compliance with chapter 6 of the Act or for impeding the practitioner’s
work. Secondly, s 71 provides for removals by shareholders, boards and the
Tribunal in contrast to s 220 of the 1973 Act that provided only for removals
by shareholders. The introduction of removals by boards and the Tribunal is
attributable to the adoption of the provisions of United States, Canadian and
Australian companies’ legislation.
The first distinction between the three types of removal provided for by
the 2008 Act relates to when they may be employed. Removal of directors
by shareholders is limited to elected directors whilst removal by the board
and Tribunal may be used for any category of directors. Removal of directors
by a board is applicable only where the company concerned has at least three
directors; in all other cases, removal must be referred to the Tribunal. No
grounds for removal are stipulated in the 2008 Act for removals by
shareholders. The same grounds are stipulated in the 2008 Act for removal by
the board and the Tribunal. These grounds relate to ineligibility, disqualifica-
tion and an inability to perform in accordance with a director’s duties.
Procedurally, there is a distinction between removal by shareholders, on
the one hand, and removal by the board and the Tribunal, on the other hand.
Directors are required to be given notice and an opportunity to orally present
a case for their retention at a shareholders’ or board meeting or Tribunal
hearing where their dismissal is to be decided upon. However, the notice
periods are prescribed for removal by shareholders while there is no
prescription for removal by the board or the Tribunal. In the interests of
certainty and consistency, the duration of notice periods ought to have been
50 THE SOUTH AFRICAN LAW JOURNAL

prescribed for all three types of removals. The 2008 Act omits the special
notice periods that were required by the 1973 Act and the provisions relating
to written representations by directors. The omission of the special notice
periods cannot be faulted as it streamlines the procedure whilst maintaining
protection for both the director and company.
The procedure is thus much faster. However, the omission of the
provisions relating to the submission and circulation of written responses by
directors is, it is submitted, unfortunate. It deprives directors, who are sought
to be removed, of the opportunity to make and present a written case for
their retention. It also deprives the persons who are deciding on the removal
of the opportunity to consider the possibility of retention prior to the
meeting. An oral presentation may not be effective in a meeting which may
become heated or unruly. However, as s 71 expressly requires that the
concerned director be given a ‘reasonable opportunity’ to make an oral
presentation to the shareholders, board or Tribunal before a decision on his
removal is made, it seems that directors still retain a meaningful right of
representation.
The 2008 Act fundamentally alters the powers of removal of shareholders
by limiting them to elected directors and placing ex-officio and directly
appointed directors beyond shareholders’ powers of removal. Ex-officio and
directly appointed directors may only be removed by a board or Tribunal.
This change is indicative of an underlying policy shift from majority
shareholder supremacy to a more balanced outlook that enables boards and
the Tribunal to also remove directors. This shift in balance is advantageous
for minority shareholders as they are now able (indirectly) to remove a
director through board or Tribunal processes as an allegation by a single
shareholder is sufficient to instigate removals. However, it is disadvantageous
to majority shareholder directors, who under the 1973 Act cannot be
removed, who are now exposed to removals by the board or the Tribunal.
This more balanced policy approach is comparable to the position in the
United States, Canada and Australia where board, judicial and enforcement
removals are provided for. However, as noted by Olson (op cit at 237–9)
there are important distinctions between the South African position and
these other jurisdictions. For instance, the 2008 Act does not require that
shareholder removals be for cause, whilst United States law requires that such
dismissals be for cause where there is a staggered board or where cumulative
voting is permitted (see s 141(k)(1)–(2) of the Delaware General Corporation
Law, by way of example). Clearly such differences are due to the divergent
nature of boards and voting practices in the two jurisdictions and it would
have been imprudent to import such provisions into South Africa. It
therefore seems that the 2008 Act only incorporates appropriate provisions
from other jurisdictions. In view of the care that has been taken to craft a
suitable statutory removal regime for South Africa, it seems that the regime is
likely to work well.
However, to ensure the success of the regime, two key uncertainties need
to be clarified. The first of these relates to the failure to stipulate notice
NOTES 51
periods for removals by the board and Tribunal. The second relates to the
distinction between directors disqualified under s 69(8)(a), on the one hand,
and s 69(8)(b), on the other hand, created by s 71(3)(a)(i). Directors disquali-
fied under s 69(8)(a) automatically lose their office, whilst directors disquali-
fied under s 69(8)(b) do not and have to be formally removed from office.
This requirement for formal removal is at odds with s 69(4), which provides
for automatic loss of office upon disqualification without distinguishing
between s 69(8)(a) and (b). As noted in the discussion above, the reasons for
this distinction in s 71(3)(a)(i) are unclear and it appears that the distinction
ought not to have been made. Unfortunately, the Companies Amendment
Bill B40–2010 does not seek to clarify these uncertainties, but as the
amendment process is ongoing (at the time of writing) hopefully it will
incorporate the necessary amendments in the near future.
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