In this day and age, and more so given the amendments to employment contracts during a time of crisis, removing directors from a company is not as simple or straightforward as you may think. The days of ‘You’re fired’ and you walk out the door with a bulging box and your ears burning are long gone, with both the company and its employees, directors and shareholders now having more protection and options under the provisions of the 2008 Companies Act.
Directors of South African Companies can step down voluntarily (i.e. resign) or they can be removed without their co-operation or consent following negligent behaviour or dereliction of duty. Removing a director from a company is a complicated process and can occur in one of three ways: a statutory removal by shareholders; a statutory removal by directors; or removal in accordance with the company’s Memorandum of Incorporation (MOI), all of which require specialised procedures that need to be followed.
PJ Veldhuizen, Managing Director at boutique commercial law firm Gillan & Veldhuizen Inc., points out that two of the major developments in the 2008 Companies Act from the 1973 Companies Act is that (1) boards of directors are now able, in certain circumstances, to remove fellow board members from office, and (2) the High Court is able to declare a director delinquent or under probation. “My advice would be to first look at the company’s MOI to ascertain how exactly a director can be removed – it is important to note, however, that regardless of any agreement between the company and a director or even an agreement between the shareholders, other shareholders and a director, the Act supersedes any provisions in an MOI,” he explains.
Another avenue for consideration is to approach The Companies Tribunal who can also remove directors but only for a company that has fewer than three directors. In all cases, a change of directors in South African law requires that the incoming/outgoing directors should be registered with the Companies and Intellectual Property Commission (CIPC).
No two scenarios are the same and it can be dangerous to remove a director without considering your legal position and the correct strategies to employ. Remember that removing an individual as a director, in terms of the provisions of the Companies Act does not affect his or her right at common law or otherwise to apply to the court for damages or other compensation. Likewise there are also many tactics that the director being removed can utilise to obtain a better exit resolution and it would be wise to consult with an attorney as to the best approach from both sides.
PJ Veldhuizen is managing director at boutique commercial law firm Gillan & Veldhuizen Inc.