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The art of law - a director who loses the support of the majority shareholders will be reduced to trying to devise a legal basis for blocking a resolution by the shareholders meeting for his removal

A director's removal by way of a shareholders' resolution or by way of a resolution of the board

The power to manage the company's business is vested in its board of directors and this principle is now enshrined in the Act itself; see section 66(1) of the Companies Act 2008. In theory, as this provision recognises, the company's memorandum of incorporation could provide otherwise, but in practice this is never done.

On the other hand, the shareholders' meeting has the power to pass ordinary and special resolutions on matters provided for in the Act. In particular, the Act provides that the shareholders' meeting can, at any time, pass a resolution removing a director from office; see section 71(1).

Control over day-to-day management as distinct from ultimate control of the company

Thus, although the board of directors controls the day-to-day management of the company's business and affairs, the shareholders' meeting retains ultimate control over the company's affairs, in the sense that it can remove one or more directors if they are not managing the company in accordance with the shareholders' wishes, and can appoint others whose management style is more in accordance with the views of the shareholders.

In a novel provision, the Companies Act 2008 now gives the board of directors the power to remove a director if he has become ineligible, disqualified, incapacitated, negligent or derelict; see section 71(3). For its part, the court has the power (see section 69(8)(a)) to prohibit a person from being a director or to declare him or her to be delinquent.

Removal of a director by the shareholders' meeting versus removal by the board

The critical difference between the power to remove a director that is vested in the shareholders' meeting and the power to remove a director that is vested in the board of directors, is that the shareholders' meeting can remove a director from office for any reason or for no reason at all - the shareholders can simply vote on the resolution as they see fit.

By contrast, the board cannot exercise its power to remove a director unless one of the statutory grounds is present. And, of course, the existence of the alleged grounds, as found by the board and relied on in its removal of a director, may be contested by the director in question and the Act explicitly gives the court the power to review the decision of the board in this regard; see section 71(5) .

Who is entitled to convene a shareholders' meeting?

The Companies Act 2008 provides in section 61(3) that the board of directors must convene a shareholders' meeting if -

'one or more written and signed demands for such a meeting are delivered to the company, and-
(a) each such demand describes the specific purpose for which the meeting is proposed; and
(b) in aggregate, demands for substantially the same purpose are made and signed by the holders, as of the earliest time specified in any of those demands, of at least 10% of the voting rights entitled to be exercised in relation to the matter proposed to be considered at the meeting.'

The word must makes clear that the board has no choice but to convene a shareholders' meeting if the requisite demand is received.

The Supreme Court of Appeal decision in Butler v van Zyl

In Butler v Van Zyl [2014] ZASCA 81 the majority shareholders had directed a written and signed demand to the company to convene a shareholders' meeting for two purposes, the first being to remove a certain Van Zyl as director and the second to appoint or confirm the appointment as director of a certain Mkhwanazi.

Van Zyl then made an urgent application to the High Court for an order interdicting the holding of the proposed shareholders' meeting to vote on his removal as a director and for an order declaring that Mkhwanazi was not a director of the company.

In this application, Van Zyl successfully invoked an interdict previously granted by a different division of the High Court - the North-West High Court - in proceedings instituted by a different litigant (one Rosenberg) in the context of an entirely different dispute between that litigant and the company.

The Supreme Court of Appeal held (see paras [19] and [21]) that, interpreted in its context, the earlier interdict did not bar the majority shareholders in the present case from demanding the convening of a shareholders' meeting to vote on the removal of Van Zyl as a director.

Analysis and overview

In Butler v van Zyl, the majority shareholders were determined to remove a particular director, Van Zyl. They could have done so via either of two processes - by way of a resolution of a shareholders' meeting in terms of section 71(1) or by way of a board resolution in terms of section 71(3).

Predictably, the shareholders opted for the former route, because - in terms of the Act and the common law - the shareholders' meeting has an absolute right to remove a director from office at any time without giving reasons whereas a board decision for a director's removal must be based on the limited statutory grounds envisaged in section 71(3) and the board resolution to remove the director can thereafter be taken to the High Court on review by the aggrieved director in terms of section 71(5).

The tactical decision to remove the director by a resolution of the shareholders' meeting had the result of painting the besieged director - van Zyl - into a corner in which his only escape lay in trying to devise some legal basis for arguing that the majority shareholders were barred from holding a meeting to vote on a resolution for his removal, or alternatively that the majority shareholders were barred from voting on such a resolution.

Hence, van Zyl's desperate invocation of an interdict, granted earlier in another court between the company and another litigant in an entirely different dispute- an invocation that was successful in the High Court but was given short shrift by the Supreme Court of Appeal.

In its essence, the decision of the Supreme Court of Appeal in this case illustrates that a director who no longer enjoys the support of shareholders holding a voting majority has no choice but to accept the inevitability of his removal from office unless he can find some legal basis for preventing the shareholders from holding the requisite meeting or for preventing the majority shareholders from voting their shares on a resolution for his dismissal.

In this case, it was held by the Supreme Court of Appeal (see para [21]) that the majority shareholders were entitled to demand that the board convene a shareholders' meeting to vote on a resolution for the removal of Van Zyl.

And that was the death-knell of Van Zyl's attempt to avoid being removed as director.

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