SHAREHOLDERS MAJORITARIANISM : Get out of office!!! a slap for Directors
Shareholders Majoritarianism: Get out of office!!! a slap for Directors
The Companies Act 71 of 2008 (the Act) strives to balance the interests of the company as a separate legal entity driven by a board of directors, on the one hand, with those of the company’s shareholders, its raison d’etre, on the other hand. Internal politics and conflicts often occur, not only at a board level but also within the different ranks of its shareholders, which conflict is inevitable given the majoritarian approach that the Act assumes.
One of the weapons in the shareholders’ arsenal during such a conflict is Section 71 of the Act, which provides, inter alia, for the removal of a director from office by the shareholders via an ordinary resolution. The Act does not prescribe a finite list of grounds/reasons for the removal of a director by shareholders, largely because “directors serve at the pleasure of shareholders” and consequently, shareholders may effect removals for a variety of reasons, objective or subjective. These removals are not subject to review by a court, in other words it is not open to the courts to second-guess the decision of the majority of shareholders, save perhaps in cases where the shareholders have acted fraudulently or in bad faith.
The procedure which must be followed by shareholders under Section 71 of the Act is, briefly as follows: the director concerned must be given notice of the meeting and the resolution, at least equivalent to that which a shareholder is entitled to receive, irrespective of whether or not the director is a shareholder of the company; and the director must be afforded a reasonable opportunity to make a presentation, in person or through a representative, to the meeting, before the resolution is put to a vote.
Due to the adaptive nature of our legal system, many argue that in order to enable such director an opportunity to make meaningful presentations at the said meeting, shareholders should furnish reasons for their intended resolution in their notice to such director. This was a position that was adopted recently by the Western Cape High Court in the case of Johannes Jacobs Pretorius & 1 Other v Steven Edward Timcke & 3 Others, case number 15479/2014 (Unreported).
This case concerned the removal of the directors of a company by its shareholders in terms of Section 71 of the Act. The shareholders gave notice to the directors of their intention to remove them by way of a resolution, and their removal followed. However, the directors challenged the procedure followed, contending that although they had received notice, the notice did not state the grounds on which the shareholders proposed to remove them.
The Western Cape High Court held that the notice was defective (and thus the resolution for the removal of the directors was invalid), in that it did not comply with Section 71(2) of the Act. In doing so the court affirmed the distinction drawn by the legislature between the removal of directors by the shareholders of a company and instances where the board seeks to remove a director (the former being less onerous). However, the court held that the requirement that the director be afforded a “reasonable opportunity to make a presentation” is to be interpreted as requiring the shareholders to furnish the director concerned with the reason or reasons for the proposed resolution in advance, in order to properly make a presentation at the meeting.
In paragraph 7 of the judgment, the court placed reliance on the decision in Minister of Defence and Military Veterans v Motau and Others 2014 (5) SA 69 CC, where the Constitutional Court held that the principles of natural justice dictate that, in the absence of reasons, the applicants could not possibly have been afforded a proper hearing and, as such, could not place facts or evidence which could have a bearing on the decision of the shareholders. The court concluded that Sections 71(1) and s71(2) require shareholders to give reasons to directors so they are afforded an opportunity to make presentations as to why they should not be removed.
It is submitted that the facts of Motau are distinguishable from the Timcke case in that Motau concerned the application of Section 71(2) of the Companies Act read together with Section 8(c) of the Armament Corporation of South Africa Limited Act, No 51 of 2003 (Armscor Act). Section 8(c) of the Armscor Act entitles the Minister of Defence and Military Veterans to dismiss the services of a board member on “good cause”. In other words, Section 8(c) of the Armscor Act introduced the threshold of “good cause” for the removal of a director, requiring the director to be given an adequate opportunity to address why this was not met in a particular case.
It is further apparent from reading the provisions of Section 71 of the Act as a whole that they were deliberately and carefully legally constructed to distinguish between notice of a proposed resolution by shareholders to remove a director and those by directors to remove one of their own. This is abundantly clear in Section 71(3) which states that, in the case of a resolution to remove a director by the board of directors, the notice of the proposed resolution must be accompanied by a statement setting out the reasons for the resolution with sufficient specificity to reasonably permit the director in question to prepare and present a response. This was emphasized in Pretorius v PB Meat (Pty) Ltd [2013] ZAWCHC 89, which judgment was delivered on 14 June 2013, and was the first High Court decision on the interpretation of Section 71 of the Act.
It is submitted that is accordingly not correct to interpret Section 71(2) of the Companies Act as requiring shareholders to provide directors with reasons for their removal in advance, or to suggest that a notice that does not disclose the reasons for the proposed resolution is defective. As there is not a finite list of grounds/reasons for which shareholders could propose such a resolution, and such grounds could indeed be subjective in nature, such a requirement could, indeed, be complied with merely by stating the reason as “because we do not like you”!
Contributor: Andile Mcineka (Candidate Attorney) (Commercial & Litigation Departments) (Umhlanga Office)
Overseen by Mr Richard Browning
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