The Companies Act 71 of 2008 (the “Act”) imposes a fiduciary duty on all directors of a company. Directors have a duty to act in good faith, exercise reasonable care, skill and diligence and act in the best interests of the company.
The fiduciary duties of a director may be relinquished if they choose to resign, or if they are removed from the board.
Removal of a Director
What happens if a director fails to meet their fiduciary duty and a danger arises of that same director harming the company’s reputation?
Directors may be removed from the board of a company either by a shareholders’ resolution, or by an order of the court.
Shareholders have the power to keep directors accountable for their actions and, if necessary, to remove directors from the Board. In terms of s71(1) of the Act, a director may be removed from the Board of Directors by a shareholders’ resolution passed at a shareholders’ meeting. Assuming that the correct procedures have been followed, this may be done despite anything to the contrary stipulated in the company’s Memorandum of Incorporation, rules, or any agreement between the company, its shareholders, and a director.
Procedurally, a shareholders’ meeting must be called and the director in question must be invited to attend the meeting. The meeting notice should include the reasons for the proposed director removal. At the meeting, the director must be afforded a reasonable opportunity to make representation in person, or through a representative to the meeting before the resolution is put to a vote. If the majority of shareholders are in agreement, then the company can apply to the Companies and Intellectual Property Commission (“CIPC”) to have the director removed.
Alternatively, a director may be removed by an order of the court, if the court is satisfied that the director is ineligible or disqualified, incapacitated, or has been negligent or derelict. Although the reasons for removal may be similar, removal by shareholders’ resolution does not require justification, but simply a majority vote in favour of removal.
A director may resign at any time, but may still be liable if she/he acted negligently during his/her directorship. The resignation of a director must be noted by the Board and the company must lodge the notice of the resignation with the CIPC.
If there are no directors left after the resignation of a director, any individual who has voting rights to vote on a matter concerning the appointment of directors can vote to appoint a new director.
Once resigned, a director may be permitted to take steps to create a competing company. However, she is not entitled to divert business opportunities to herself nor may she engage in unlawful competitive behaviors. This would include the apportionment of the company’s business.
In conclusion, the onus is always on the director to uphold their fiduciary duties. A director may be removed by shareholders’ resolution, or by the court for failing to exercise these duties. Alternatively, a director may resign, but can continue to be held liable for failure to uphold their fiduciary duties during their tenure.