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CHAPTER 3 THE REMOVAL OF DIRECTORS BY THE BOARD OF DIRECTORS
INTRODUCTION
The board of directors is empowered by section 71(3) of the Companies Act to remove a director from office. Before the board of directors may validly remove a director from office, the procedures set out in section 71(4) of the Companies Act must be meticulously complied with. This chapter examines the grounds under which a director may be removed from office under section 71(3) of the Companies Act, and the procedural requirements to do so. It compares the grounds for removal of a director by the board of directors and the requisite procedures with the equivalent provisions in the Australian Corporations Act of 2001, the UK Companies Act of 2006, the MBCA, the DGCL1 and the corporations laws of various States in the USA, with a view to assessing the extent to which sections 71(3) and (4) of the (South African) Companies Act measure up to their equivalent provisions in the foreign jurisdictions considered. This chapter also discusses how the provisions of South African company law on the removal of directors by the board of directors may be strengthened and improved. The removal of directors by the Companies Tribunal under section 71(8) of the Companies Act is also discussed in this chapter.
THE POWER CONFERRED ON THE BOARD OF DIRECTORS TO REMOVE DIRECTORS FROM OFFICE
The power conferred on the board of directors to remove directors from office under the (South African) Companies Act is examined, followed by a discussion of this power under the Australian Corporations Act of 2001, the UK Companies Act of 2006, the MBCA, the DGCL and the relevant corporate legislation of various States in the USA.
Power of the Board of Directors to Remove Directors under the Companies Act
The Companies Act contains two main types of provisions. The first one is the unalterable provision. An unalterable provision is a provision of the Companies Act that does not expressly contemplate that its effect on any particular company may be negated, restricted, limited, qualified, extended or otherwise altered in substance or effect by a company’s Memorandum of Incorporation or rules.2 A company may not “contract out” of the unalterable provisions of the Companies Act.3 A company’s Memorandum of Incorporation may however impose a more onerous requirement on the company than that contained by an unalterable provision of the Companies Act.4
The second type of provision is the alterable provision, which is a provision of the Companies Act in which it is expressly contemplated that its effect on a particular company may be negated, restricted, limited, qualified, extended or otherwise altered in substance or effect by that company’s Memorandum of Incorporation.5 Most of the alterable provisions of the Companies Act are “opt-out” provisions, that is, they will apply to the company unless it opts out of them by expressly stipulating so in its Memorandum of Incorporation, as opposed to the “opt-in” provisions which do not apply to a company unless it specifically so provides in its Memorandum of Incorporation.6
It is submitted that the power conferred by section 71(3) of the Companies Act on the board of directors to remove fellow board members is an unalterable provision as it does not expressly contemplate that its effect may be negated, restricted, limited, qualified, extended or otherwise altered in substance or effect by a company’s Memorandum of Incorporation. It follows that no Memorandum of Incorporation of a company may negate, restrict, limit, qualify, extend or alter the substance or effect of the power conferred by section 71(3) of the Companies Act on the board of directors to remove fellow board members. It is evident that under the Companies Act the board’s power to remove fellow board members is a mandatory statutory power that may not be contracted out of.
Both section 69ter(6) of the Companies Act 46 of 1926 and section 220(7) of the Companies Act 61 of 1973 provided that nothing in those sections should be taken as “derogating from any power to remove a director which may exist apart from this section”. This provision made it clear that the statutory method of removing a director from office was not the only ground on which a director could be removed from office. It also had the effect of exempting a company from having to comply with the statutorily prescribed procedures to remove a director should such procedures be regulated in the constitution of the company.7 There is no similar provision in section 71 of the Companies Act. Now that this provision has been removed from the Companies Act it would appear that a director of a company must be removed solely and strictly in terms of the Companies Act and in accordance with the provisions of section 71 of the Companies Act.
However, section 71 does not (unlike some other provisions in the Companies Act), explicitly exclude any right at common law to remove a director from office.8 It is consequently not clear whether section 71 of the Companies Act applies in substitution for any rights at common law to remove a director from office, or whether it exists concurrently with the common law rights to remove a director. It is submitted that since section 71 is a mandatory provision it impliedly repeals any common law principles relating to the removal of directors from office. In any event, if the common law were to apply to the removal of directors from office it could defeat the purpose of the statutory protection provided to directors under section 71 of the Companies Act if such common law procedures did not measure up to the statutory protection provided to directors by section 71 of the Companies Act.
In contrast to the Companies Act, the company law statutes of the foreign jurisdictions considered do not confer on the board of directors an unalterable statutory power to remove fellow board members from office. The conferral of power on the board of directors to remove fellow board members in Australia, the UK and the USA is discussed below.
Power of the Board of Directors to Remove Directors under the Australian Corporations Act of 2001
The Australian Corporations Act of 2001 makes a clear distinction between public companies and private companies with regard to the removal of directors by the board of directors.9 Directors of public companies in Australia may not remove fellow board members. Section 203E of the Australian Corporations Act of 2001 states that a resolution, request or notice of any or all of the directors of a public company is void to the extent that it purports to remove a director from his office or requires a director to vacate his office. It is thus patently clear that in Australia the power to remove directors of public companies is a power that may not be assumed by the board of directors. The Australian Institute of Company Directors has expressed the view that allowing a board of directors to remove a director could potentially compromise the essential independence of mind (of the directors comprising the board) that is the objective of many corporate governance principles.10 The example given by the Australian Institute of Company Directors is that a director who conscientiously challenges a board’s thinking may be fulfilling his duties under the Australian Corporations Act of 2001.11 Section 203E of the Australian Corporations Act of 2001 embodies in public companies the concept of shareholder democracy and control,12 that shareholders should ultimately have the power to remove directors.13
CHAPTER 1 INTRODUCTION
1. INTRODUCTION
2. REMOVAL OF DIRECTORS FROM OFFICE
3. METHODOLOGY
4. REFERENCE TECHNIQUES
CHAPTER 2 REMOVAL OF DIRECTORS: PHILOSOPHICAL UNDERPINNINGS
1. INTRODUCTION
2. THE DIVISION OF POWERS BETWEEN DIRECTORS AND SHAREHOLDERS
3. THE SEPARATION OF OWNERSHIP AND CONTROL
4. SHAREHOLDERS’ POWER TO REMOVE DIRECTORS FROM OFFICE
5. IMPACT OF THE BOARD’S POWER TO REMOVE A DIRECTOR FROM OFFICE
6. IMPACT OF THE COURT’S POWER TO REMOVE A DIRECTOR FROM OFFICE
7. MAINTAINING THE BALANCE OF POWERS WITH REGARD TO THE REMOVAL OF DIRECTORS FROM OFFICE
8. CONCLUSIONS AND RECOMMENDATIONS
CHAPTER 3 THE REMOVAL OF DIRECTORS BY THE BOARD OF DIRECTORS
1. INTRODUCTION
2. THE POWER CONFERRED ON THE BOARD OF DIRECTORS TO REMOVE DIRECTORS FROM OFFIC
3. DIRECTORS TO WHOM THE BOARD’S POWER OF REMOVAL OF DIRECTORS APPLIES
4. COMPANIES TO WHICH THE BOARD’S POWER OF REMOVAL OF DIRECTORS APPLIES
5. LOCUS STANDI TO INITIATE A BOARD MEETING TO REMOVE A DIRECTOR FROM OFFICE
6. THE GROUNDS FOR REMOVAL OF A DIRECTOR BY THE BOARD OF DIRECTORS
7. DISCRETION OF THE BOARD OF DIRECTORS TO REMOVE A DIRECTOR FROM OFFICE
8. THE PROCEDURE FOR REMOVAL OF A DIRECTOR BY THE BOARD OF DIRECTORS
9. REMOVAL OF A DIRECTOR BY THE COMPANIES TRIBUNAL .
10. CONCLUSIONS AND RECOMMENDATIONS
CHAPTER 4 DIRECTORS’ FIDUCIARY DUTIES AND THE REMOVAL OF DIRECTORS
1. INTRODUCTION
2. APPLICATION OF FIDUCIARY DUTIES IN THE REMOVAL OF DIRECTORS BY SHAREHOLDERS AND BY THE BOARD OF DIRECTORS
3. FIDUCIARY DUTIES OF DIRECTORS WHEN REMOVING A DIRECTOR FROM OFFICE
4. CONSEQUENCES OF A BREACH OF FIDUCIARY DUTY IN REMOVING A DIRECTOR FROM OFFICE
5. CONCLUSIONS AND RECOMMENDATIONS
CHAPTER 5 THE REMOVAL OF DIRECTORS HOLDING MULTIPLE POSITIONS IN A COMPANY
1. INTRODUCTION
2. THE REMOVAL OF DIRECTORS WHO ARE EMPLOYEES
3. THE REMOVAL OF SHAREHOLDING‐DIRECTORS HOLDING LOADED VOTING RIGHTS
4. CONCLUSIONS AND RECOMMENDATIONS
CHAPTER 6 THE JUDICIAL REMOVAL OF DIRECTORS FROM OFFICE
1. INTRODUCTION
2. SECTION 71(6) OF THE COMPANIES ACT
3. SECTION 162 OF THE COMPANIES ACT
4. CONCLUSIONS AND RECOMMENDATIONS
CHAPTER 7 REMEDIES WITH REGARD TO THE REMOVAL OF DIRECTORS FROM OFFICE BY THE BOARD OF DIRECTORS
1. INTRODUCTION
2. SECTION 71(5) REVIEW
3. APPLICATION FOR DAMAGES OR OTHER COMPENSATION FOR LOSS OF OFFICE IN TERMS OF SECTION 71(9) OF THE COMPANIES ACT
4. OPPRESSION REMEDY
5. DEFAMATION
6. CONCLUSIONS AND RECOMMENDATIONS
CHAPTER 8 CONCLUSIONS AND RECOMMENDATIONS
1. INTRODUCTION
2. CONCLUSIONS AND RECOMMENDATIONS
3. CONCLUDING REMARKS
BIBLIOGRAPHY
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A CRITICAL ANALYSIS OF THE REMOVAL OF DIRECTORS BY THE BOARD OF DIRECTORS AND THE JUDICIARY UNDER THE COMPANIES ACT 71 OF 2008
