In practice one often finds one’s self dealing with the situation where the shareholders of a private company who are also the directors of said company have fallen into a dispute and have reached the situation where they can no longer work together. At this point in time, one of the shareholders may look to take steps to have the other shareholder removed in his capacity as a director so that he may take control over the business and affairs of the company to the exclusion of the other shareholder.

Given the fact that there are virtually an unlimited number of variations of scenarios which may arise, for the purposes of this article I will use the following hypothetical set of facts. Company A has two shareholders, Mr X and Mr Z. Mr X holds 51% of all the issued shares in Company A and Mr Z holds the remaining 49% of the issued shares. Mr X and Mr Z are the sole directors of Company A. Mr X and Mr Z have fallen into a dispute and Mr X now wishes, as he is the majority shareholder in Company A, to remove Mr Z as a director of Company A. Company A has adopted the CoR15.1A (the Short Standard Form for Private Companies) (“the Standard MOI”) as its memorandum of incorporation.   

Section 71(1) of the Companies Act, 2008 (“the Companies Act”) provides that:

Despite anything to the contrary in a company’s Memorandum of Incorporation or rules, or any agreement between a company and a director, or between any shareholders and a director, a director may be removed by an ordinary resolution adopted at a shareholders meeting by the persons entitled to exercise voting rights in an election of that director, subject to subsection 2”.

The referred to “subsection 2” above requires that: (i) the aforementioned director be given written notice of the meeting and the resolution, at least equivalent to what a shareholder is entitled to receive; and that the aforementioned director must be afforded a reasonable opportunity to make a presentation, in person or through a representative, to the meeting, before the resolution is put to a vote.

The above requirements appear to be straight forward enough, however they do come with their own set of challenges which will be discussed below with reference to the hypothetical set of facts set out above.

Calling the Shareholders Meeting

The removal of a director is one of the instances whereby a shareholders’ resolution must be submitted to the shareholders at a meeting of the shareholders and is not capable of being submitted to the shareholders by means of round robin resolution as provided for in section 60 of the Companies Act. This is because of the requirement that the director must be afforded the opportunity to make a presentation in person or through a representative before the matter is put to the vote.

Section 61 of the Companies Act, inter alia, sets out instances whereby a shareholders meeting can and/or must be convened by a company. In all instances it is the responsibility of the board of directors to convene a shareholders’ whether on their own initiative or whether they were otherwise obliged to in terms of the Companies Act or the company’s memorandum of incorporation.

With regards to the hypothetical set of facts, Mr X is not be in a position to call a shareholders meeting on his own accord, as a precursor to calling a shareholders would entail a directors resolution resolving to call a shareholders’ meeting. At a board level Mr X and Mr Z each have one vote and any decision of the board must be supported by a majority of votes cast on a resolution.

In view of the aforementioned Mr X would have to rely on section 61(3) of the Companies Act which states:

“…the board of a company … must call a shareholders meeting if one or more written and signed demands for such a meeting are delivered to the company, and each such demand describes the specific purpose for which the meeting is proposed; and 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.

This would essentially mean that Mr X would have to write a letter to Company A demanding that a shareholders’ meeting be convened and that a resolution regarding Mr Z’s removal as a director be submitted at that meeting. Mr X would then have to receive the aforementioned letter in his capacity as a director of Company A and proceed to call a directors’ meeting.

Calling a directors meeting in terms of the Standard MOI provides its own set of challenges. Firstly, neither the Standard MOI nor the Companies Act specifies time periods for when a directors’ meeting must be held after a director has called a directors’ meeting. It merely states that “The board of the company may determine the form and time for giving notice of its meetings…”. Secondly, since a majority of directors are required to be present at a directors’ meeting in order to constitute a quorum at such meeting, both Mr X and Mr Z would have to attend. Therefore, if Mr Z were to intentionally avoid any directors’ meeting, a quorum would be incapable of being met and no matter could therefore be voted on.

To compound the problem, neither the Companies Act nor the Standard MOI provides any immediate relief in this regard (i.e. a provision comparable to section 64(4) of the Companies Act which relates to shareholders). The only remedy for a shareholder in a situation whereby the directors of a company fail to call a shareholders’ meeting is to make an application to Court.

At this point it time, Mr X would inevitably be tempted to simply, on his own accord, convene a shareholders’ meeting and also provide notice to Mr Z in his capacity as director as required by section 71(2)(a) of the Companies Act. This course of action would not be advisable at all. In the decision of Gauteng High Court in Van Zyl v Nuco Chrome Bophuthatswana (Pty) Ltd (43825/2012 [2013] ZAGPJHC 40 (13 March 2013), the court, inter alia, found as follows: (i) if a shareholders’ meeting is not lawfully convened in accordance with the Companies Act – i.e. by a single director and not the board –

       the notice of the meeting is fatally defective;

       a defect as aforementioned may only be remedied by unanimous approval by all shareholders; and

       any irregularity in regard to the convening of or proceedings at a general meeting will render invalid resolutions passed at that meeting.

Entitled to vote on election of Mr Z as a director

In order for Mr X to be entitled to remove Mr Z as a director of Company A, Mr X must have been entitled to vote on the election of Mr Z as a director. In this regard the Standard MOI prescribes that directors be elected in the manner specified in section 68(2) of the Companies, namely directors are to be elected separately (i.e. the election is to be conducted as a series of votes, each of which is on the candidacy of a single individual to fill a single vacancy) with the series of votes continuing until all vacancies on the board at that time have been filled and each share entitled to vote may be cast once and the vacancy is filled by a majority of votes cast for candidate.  In view of the aforementioned Mr X would have been entitled to vote on Mr Z’s appointment and therefore this requirement is met.

Sufficient votes to pass an ordinary resolution

Mr X will have to have sufficient votes to pass an ordinary resolution, in this regard considering Company A has adopted the Standard MOI which states that an ordinary resolution shall be passed if it is supported by more than 50% of the votes exercised on the resolution.

Even though Mr X may have the majority of votes he will still need to keep his wits about him at the shareholders’ meeting itself by demanding that the vote be conducted by means of a poll and not a show of hands. Should Mr X fail to demand that the vote be conducted by means of a poll and the vote is conducted by a show of hands, each shareholder or proxy of a shareholder present thereat will only be entitled to exercise one vote, and therefore Mr X would not have a sufficient majority to pass the ordinary resolution (on the assumption Mr Z attends and votes against his removal). Whereas if the matter is referred to voting by polling, Mr X will have the number of votes determined in accordance with the voting rights associated with the shares held by him, namely 51%, and therefore enough to pass the ordinary resolution.

Conclusion

Situations such as these can be very hostile and are often driven by emotions rather than commercial factors. In the light of the aforementioned it is always advisable that the time and effort is taken to adequately provide for all the various permutations at the beginning of a “commercial marriage” rather than relying on the default position during its “divorce”.