It is often important for shareholders of private companies to either be on the board of directors themselves, or to have someone sit on the board who they trust. So let’s look at who gets to choose who the directors are, and who has the power to remove them from their directorship position.
Becoming a Director
Under the Companies Act (No. 71 of 2008) (“Companies Act”) the following applies:
- at least 50% of the directors must be elected by the shareholders by ordinary shareholder resolution, which means by a vote of MORE than 50% of the votes cast on that resolution (“ordinary resolution”);
- a maximum of 50% of the directors can be appointed by a person or persons named in, or determined in terms of, the company’s memorandum of incorporation (“MOI”), and in such case they do not need to also then be elected by the shareholders. They become directors merely through such appointment.
However, the company’s MOI or the Shareholders Agreement can record a variety of terms that alter the Companies Act requirements (without breaching them), so that specific shareholders (and especially shareholders with less than 50.1% of the votes) can ensure they get the board representation they want.
The most common way of doing so is to record that specific shareholders (either named shareholders, or shareholders who each own 20% of the issued shares, for example), have the right to nominate one director for election to the board, and the remaining shareholders undertake to vote in favour of such election. By making this right a nomination, followed by an election, we still comply with the Companies Act requirement to have at least 50% of the directors elected and not just appointed.
Removing a Director
Directors can be removed from their position as directors under the Companies Act as follows:
- they can be removed by shareholders’ ordinary resolution passed at an in person meeting of shareholders. What is important to note above this is :
- the resolution must be passed at an in person meeting, and cannot be done by round robin; and
- while for all other ordinary resolution matters a company can, in its MOI, increase the required percentage for it from “more than 50% “ to a higher percentage, but it cannot increase this percentage in respect of removing directors.
- if there are more than two directors, and a shareholder or director has alleged that a director has become ineligible, disqualified and/or incapacitated (and here I summarise the Companies Act substantially), that director can be removed by a directors resolution subject to various requirements.
One of the main ways to protect yourself as a shareholder from being removed as a director, or from having the specific director in place that you trust being removed, is by ensuring you have the right to always nominate and have your nominated person elected as a director, as mentioned above. This at least means that if that specific person who you nominated is removed as a director, you have the right to nominate and have elected a new person as a director, and thereby still have someone on the board that you trust.