By Jean-Louis Nel, Associate – Tax & Commercial
It is trite law that, irrespective of the provisions of a Company’s Memorandum of Incorporation, a director can be removed by an ordinary resolution adopted at a shareholders meeting as provided for in Section 71 of the Companies Act 71 of 2008 (the “Act”). This provision was, however, recently scrutinized by the High Court in the matter of Foxvest Group (Pty) Ltd and Another v Rocky Park Holdings (Pty) Ltd and Others (2022/2807)  ZAGPJHC 63 (27 January 2023).
The Legal Position:
The introductory wording of Section 71(1) and 71(2) of the Act provides for the mechanism to remove a director. In terms of the latter provisions, to remove a director the following preemptory requirements must be complied with:
- There must be a shareholders meeting;
- Only the shareholders that are entitled to exercise voting rights in election of a director may adopt the said ordinary resolution to remove such a director;
- Section 65(7) read with Section 65(8) of the Act provides that an ordinary resolution in the case of the removal of a director shall be adopted if more than 50% of the voting rights exercised by shareholders support such ordinary resolution, notwithstanding that the company’s Memorandum of Incorporation provides for a higher percentage in respect of ordinary resolution; and
- The director concerned must be given notice of the meeting, the resolution and be afforded the opportunity to make representations.
It follows that the first step to be taken is the requisition of a shareholders meeting. The right to request a shareholders meeting may originate from the Memorandum of Incorporation of the company or in terms of Section 61(3) of the Act. In terms of Section 61(3), the board of a company must call a shareholders meeting if one of more written and signed demands for such shareholders meeting are delivered to the company. The demand must comply with the requirements as out in Section 61(3)(a) – (b) of the Act namely:
” 61. Shareholders meetings
- (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.”
[It is worthy to note that the 10% threshold may be lower if so specified in the company’s Memorandum of Incorporation.]
Once a shareholders meeting has been requested, the board is empowered to propose resolutions to be considered by the shareholders, in addition thereto, shareholders are also empowered to propose resolutions to be considered at the shareholders meeting as provided for in Section 65(3) of the Act. Section 65(3) of the Act provides as follows:
“(3) Any two shareholders of a company -
- (a) may propose a resolution concerning any matter in respect of which they are each entitled to exercise voting rights; and,
- (b) when proposing a resolution, may require that the resolution be submitted to shareholders for consideration (i) at a meeting demanded in terms of section 61 (3);…” (emphasis added)
The working of Section 65(3) of the Act empowers shareholders of a company to submit resolutions for consideration. This is valuable mechanism offered to shareholders by the Act, especially, where the board of the company is reluctant to propose a resolution that deals with the matters to be considered at a shareholders meeting, for example the removal of a director from the board.
Foxvest Group (Pty) Ltd and Another v Rocky Park Holdings (Pty) Ltd and Others:
In the Foxvest-matter, Rocky Park Holdings (the “Respondent”) and Foxvest Group (the “Applicant”) held 51% and 49% of the issued share capital in the company, respectively. The Respondent requisitioned a shareholders meeting in terms of Section 61(3) of the Act, which requisition was sent to the board of directors of the company. The purpose of the shareholders meeting was to inter alia remove Mr. Blarney as a director of the company.
On the day in question, neither the Applicant nor Mr. Blarney attended the shareholders meeting, the Respondent on its own accord as a shareholder of the company adopted an ordinary shareholders’ resolution in terms of Section 71 of the Act to remove Mr. Blarney as a director. The written resolution was later transmitted to the Applicant. Interestingly, the resolution to remove Mr. Blarney was not proposed by the board of the company, but originates from the Respondent’s interpretation of Section 65(3) of the Act, namely, that the Respondent as a shareholder is empowered to propose a resolution to be considered at a shareholders meeting.
The Court held in order to remove Mr. Blarney in terms of Section 71 of the Act, there should be an ordinary resolution that complies with the provisions of Section 65(3) of the Act. The effect thereof is, that a resolution proposed by a single shareholder is not sufficient to be considered against the wording of Section 65(3) of the Act.
The Court found that the resolution to remove Mr. Blarney was unlawful and invalid. The reasoning of the court is premised on the following extracts from paragraph 13:
- ”Sub-section 65(3) of the Act is an empowering provision. It empowers 'Any two shareholders of a company' to propose a resolution on matters where they have voting rights. The provision does not say 'any shareholder' may propose a resolution. The word or number 'two' and the plural 'shareholders' have been specifically mentioned by the legislature. They cannot be ignored. They are not superfluous or insignificant. On the contrary they are most significant. The two words read together are clearly designed to ensure that at least two shareholders propose the resolution.”
Section 71(1) and (2) of the Act, allow for the removal of a director by ordinary resolution. Should such resolution originate from the domain of shareholders, it is imperative that the proposal of the resolution be supported by two shareholders of a company in compliance with Section 65(3) of the Act, failing which, the resolution may be set aside. Consequently, where a company has more than two shareholders, a director cannot be merely removed by a single shareholder that proposes such a resolution, despite the fact that a single shareholder may hold majority voting rights.