Sharp case

One of the key issues before the court in the Sharp case, was whether the attempted removal of Sharp as a director, by way of a resolution passed at a purported shareholders’ meeting, was valid.

The Companies Act, at section 71(1), states that shareholders may remove a director via an ordinary resolution adopted at a shareholders’ meeting by the persons entitled to exercise voting rights in an election of that director. However, there is a procedure that must be followed:

• a shareholders’ meeting must be called (i.e. a round-robin resolution is not sufficient if not all shareholders have waived the requirement);
• notice must be given of the meeting to the director concerned (equivalent to the notice a shareholder is entitled to receive); and
• that director must be given a reasonable opportunity to provide representations to the shareholders as to why they should not be removed.

The case confirms a point which in all likelihood was always intuitive but is not so clear in the Companies Act: one cannot use the section 60 “round robin” process for removing directors. This is because section 71 gives the affected director a right to make representations – an opportunity that is entirely absent when a written resolution is summarily passed by shareholders by way of email exchanges.

A word of advice this regard: although the Companies Act does not stipulate that reasons must be given as to why a director is being removed by shareholders, companies may nevertheless find it challenging to record the removal of a director at the Companies and Intellectual Property Commission (CIPC)if at least some high-level reasons are not given. This is because the (highly controversial) case of Pretorius and Another v Timcke and Others (15479/14) [2015] ZAWCHC 215 (2 June 2015) still seems to loom large and is widely relied on as the authority for the notion that shareholders must give reasons. Save yourself the headache and write up some reasons in the notice.

Given that in the Sharp case the shareholders’ “meeting” (if one could even call it that, on the facts) attempting to remove Sharp was convened without proper notice, akin to a section 60 round robin, with no waiver of the notice period by the shareholders and with no opportunity being given to the director concerned to argue his case, the court found that the removal was invalid and was set aside. An intriguing question alluded to but not answered in this case is: what if all shareholders agree to shorten the normal notice period (10 business days for private companies, 15 business days for public companies) but the affected director does not? Is that still a valid section 71(1) meeting? It is not advisable to take a chance on procedural matters – rather give the director the full notice period.

The Sharp case also considered the appointment of other directors to the board of the company concerned. Where directors are elected to the board, this may take place via a resolution passed at a properly convened shareholders’ meeting or via a round-robin resolution of shareholders.

It is unfortunate that the Sharp case made certain remarks that section 60 round robins require a “notice period”, as with the convening of shareholders’ meetings. This is almost certainly incorrect: round robins are passed as soon as the requisite majority is obtained after circulation of the resolution (provided that all shareholders received the resolution). Be that as it may, the court found that the appointment of the new directors was valid as the shareholder raising the dispute did not object or raise any concerns for more than a month after the appointments were effected by way of section 60 and without a “notice period”. Furthermore, the shareholder had signed a later company resolution authorising one of the new directors to sign documents on behalf of the company. The shareholder’s actions amounted to tacit acceptance and a waiver of their right to object to the appointment of the new directors.

Jones case

The court in this case had to consider two rival factions on the boards of a group of companies, that had instituted two processes attempting to remove certain of the other faction’s directors.

The board of directors of a company may, by resolution under section 71(3), vote to remove a director, if they are determined to be:

• ineligible to serve or disqualified from serving on the board;
• incapacitated; or
• negligent or derelict in their duty as a director.

This resolution must also only be passed after notice has been given to the director to be removed, along with an opportunity to make representations. In this scenario, it is not debatable that the director must be given reasons, as only certain grounds suffice for section 71(3) purposes

The court in the Jones case engaged in a review of the board’s decision to remove a director, under section 71(5) of the Companies Act. The key decision that the court made (and there have been inconsistent decisions to date in this regard) was that this was a review in the “wide sense” and therefore the court was allowed to look at (i) whether or not the correct and lawful procedure was followed to remove the director (i.e. proper notice, the opportunity to make representations) and (ii) whether or not the board’s decision to remove was actually and substantively correct. This amounts to a “complete reconsideration, in the wide sense, of the boards’ determination”.

The court in the Jones case made a further noteworthy point in respect of the removal process: the cited grounds for the purported removal of the first faction, on the basis of “dereliction of duty” under section 71(3), were that this faction had earlier requisitioned a shareholders’ meeting (under section 61(3)) for the removal of the other faction under section 71(1)! The best form of defence is attack, as they say. The alleged ulterior motive was that the first faction was trying to protect the managing director, this being in dereliction of their fiduciary duties, as alleged. But, the court held, when the first faction put the section 61(3) requisition in, they acted in their capacity as shareholders and not in their capacity as directors. They were, in that capacity, not bound by fiduciary principles. Section 71(3) was therefore not activated.  

Therefore, where a director is also a shareholder, they must be clear as to whether they are requisitioning a meeting as a shareholder (if they hold, or acting in concert hold, 10% or more of the shares in the company) or are they requesting or convening a board meeting in their capacity as a director.