What is a casual vacancy?

Although it is not a term used or defined in the Companies Act with regard to board vacancies, the term “casual vacancy” is relatively well understood in company law practice – and the main significance of there being a causal vacancy is typically (and unless the MOI provides otherwise) that the board can swiftly fill that vacancy on a temporary basis without shareholder approval, the latter being a rigmarole in widely-held companies. The leading commentator Henochsberg says that “a casual vacancy is any vacancy which occurs otherwise than one ‘which predictably and routinely occurs and is filled at the annual general meeting’.”

Vacancies are considered “casual” when they occur due to unforeseen circumstances (such as those listed in section 70(1)(b) of the Companies Act) and thus result in a premature vacancy on the board: resignation, death, loss of an ex officio position, incapacity, disqualification and removal. As such, where a vacancy arises due to the natural expiration of a director’s term (if the MOI provides for fixed terms), it will not be considered casual.

If a casual vacancy remains open for an extended period of time, it can give rise to significant challenges for a company and may impact the functioning of an organisation as a whole, and the question arises as to whether it is too late for the board to exercise its powers to temporarily fill the vacancy. It is therefore essential that these vacancies are addressed efficiently and timeously.

Filling a casual vacancy

Firstly, it must be understood that the process for “finally” filling a casual vacancy varies depending on a company’s MOI and how the director got onto the board in the first place. The Companies Act identifies three “modes” of being placed onto a board: a direct appointment by a party in terms of the MOI; an ex officio director; or, as a default, an election by shareholders.

If the vacancy is to be filled for good, the original mode will apply in the same way to the filling of the vacancy – that much is clear. However, a further discussion of the board’s powers in this regard is warranted.

Section 68(3) of the Companies Act is the key provision in this regard. It states that when a casual vacancy arises, and unless the MOI provides otherwise, the board may appoint a person who satisfies the requirements for election as a director to fill the vacancy and serve as a director of the company on a temporary basis until the vacancy has been filled by following the appropriate process set out above. A couple of practical questions often exercise the minds of many company secretaries:

• While it is not entirely clear from the relevant sections, in all likelihood the board can only use its vacancy-filling power in respect of those departing directors who were, in the first place, elected by shareholders. The other modes (direct appointment and ex officio directorship) can arguably only apply sensibly if those specific circumstances arise, i.e. the named person in the MOI appoints a new director, or there is new incumbent to the ex officio
• When is it too late for the board to fill a casual vacancy? Again, this is not clear. But section 70(3) probably gives the strongest clue in this regard by providing that a vacancy in respect of an elected director must be filled at the next annual general meeting (AGM) (if the company is required to have an AGM – this includes all public companies) or, otherwise, within six months, by shareholders. Piecing the sections together and applying a purposive approach, it seems that once the aforesaid events have come and gone (the next AGM or six months) the board has arguably “forfeited” its chance to fill the vacancy as it has not exercised its power within a reasonable time.

Although it is somewhat of a digression, another important question, nevertheless, is whether a board can rely on its vacancy-filling power in section 68(3) to simply add an additional director onto the board, without there first having been a resignation, death, removal or the like. Is section 70 a closed list of “vacancies”? Or can the directors “manufacture” an additional category of vacancy by resolving that the company needs more directors in order to bolster the board? This remains an untested question, but given the strong tradition in company law that directors are (at least as a default position) elected by shareholders, and not by the board, it seems unwarranted to adopt an expansive interpretation of section 68(3) to allow the adding of new directors without more. To be safe, rather ensure there is such a power contained in the MOI before the board embarks on that course.