Directors can be called into question
Boards forced to meet to discuss merits of complaint, regardless of merit
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).