Di­rec­tors can be called into ques­tion

Boards forced to meet to dis­cuss mer­its of com­plaint, re­gard­less of merit

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - YANIV KLEIT­MAN & LAUREN WIL­LIAMS

NEW mech­a­nisms con­tained in sec­tion 71 of the new Com­pa­nies Act will en­able any share­holder of a com­pany to re­quest the board of di­rec­tors to de­ter­mine whether a di­rec­tor should be re­moved from the board.

Sec­tion 71 pro­vides that a per­son may be re­moved from the of­fice of di­rec­tor in one of three ways: by way of an or­di­nary share­hold­ers’ res­o­lu­tion, through a board res­o­lu­tion at a board meet­ing called at the be­hest of any share­holder, or by the Com­pa­nies Tri­bunal.

In com­par­i­son, sec­tion 220 of the old Com­pa­nies Act pro­vided for re­moval only by way of an or­di­nary share­hold­ers’ res­o­lu­tion.

In the case of re­moval by the board or Com­pa­nies Tri­bunal, the pro­ce­dure to be fol­lowed de­pends on the num­ber of di­rec­tors on the board. Where there are three or more, a board res­o­lu­tion will suf­fice; for two or less di­rec­tors, the Com­pa­nies Tri­bunal must de­ter­mine the re­moval of the di­rec­tor on ap­pli­ca­tion by a share­holder.

Sec­tion 71(3) al­lows any share­holder of a com­pany (or any di­rec­tor, for that mat­ter — the rem­edy is not lim­ited to share­hold­ers), re­gard­less of the size of his share­hold­ing or in­flu­ence in the com­pany, to al­lege that a par­tic­u­lar di­rec­tor is dis­qual­i­fied or in­el­i­gi­ble to be a di­rec­tor, or has be­come in­ca­pac­i­tated and will not re­gain ca­pac­ity within a rea­son­able time, or has been neg­li­gent or derelict in car­ry­ing out his func­tions as a di­rec­tor.

The board must then call a meet­ing of di­rec­tors to de­ter­mine the mat­ter. There is no spe­cific pro­tec­tion in sec­tion 71 against vex­a­tious or friv­o­lous al­le­ga­tions made by a share­holder. The board must, re­gard­less of the merit in theal­le­ga­tion, at the very least con­vene a meet­ing to de­ter­mine the mat­ter.

The be­lea­guered di­rec­tor is given an op­por­tu­nity to make rep­re­sen­ta­tions at the board meet­ing. If re­moved, he will be en­ti­tled to re­course to a court to re­view his re­moval. Con­versely, should the di­rec­tor not be re­moved, the di­rec­tors who voted in favour of his re­moval, or the ag­grieved share­holder who ini­tially laid the com­plaint, will also have re­course to court.

Com­pa­nies could find it dif­fi­cult, if pos­si­ble at all, to min­imise the ef­fect of this new pro­vi­sion by way of the com­pany’s mem­o­ran­dum of in­cor­po­ra­tion, since it is an un­al­ter­able pro­vi­sion of the new act. Agree­ments among di­rec­tors to vote in a par­tic­u­lar way are also dif­fi­cult to en­force be­cause of the fun­da­men­tal duty in law on di­rec­tors to ex­er­cise an un­fet­tered dis­cre­tion.

Get­ting share­hold­ers to agree, in terms of a share­hold­ers’ or “vot­ing pool” agree­ment, to not make al­le­ga­tions un­der sec­tion 71(3) could prove fu­tile be­cause of the new anti-avoid­ance mech­a­nisms con­tained in sec­tion 6 of the new leg­is­la­tion. The new mech­a­nisms for re­moval ad­dress is­sues re­lat­ing to share­holder pro­tec­tion. It would be dif­fi­cult to ar­gue that a share­holder can waive his right to al­lege that a di­rec­tor is dis­qual­i­fied in law for be­ing con­victed of an of­fence in­volv­ing dis­hon­esty, for in­stance.

Pre-ex­ist­ing share­hold­ers agree­ments (that is, share­hold­ers’ agree­ments that were in force as at the com­mence­ment date of the new act, on May 1 2011), some­times con­tain pro­vi­sions to the ef­fect that the only way a di­rec­tor can be ap­pointed or re­moved is through a writ­ten no­tice of a par­tic­u­lar share­holder. De­pend­ing on how the pro­vi­sion is worded, this could be in con­flict with sec­tion 71(3), which al­lows re­moval by the board. The gen­eral twoyear grace pe­riod granted by the act in re­spect of pre-ex­ist­ing share­hold­ers’ agree­ments may re­sult in such pro­vi­sions trump­ing sec­tion 71(3) dur­ing the grace pe­riod.

Any re­moval of a di­rec­tor pur­suant to the new mech­a­nisms is with­out prej­u­dice to any claim for com­pen­sa­tion by a di­rec­tor as a con­se­quence of his re­moval from the of­fice of di­rec­tor, or any other of­fice (such as em­ploy­ment).

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