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The Device of Weighted Votes in Blocking the Removal of Directors from Office under the South African Companies Act 71 of 2008
Published online by Cambridge University Press: 04 July 2019
Abstract
A director may serve a company in more than one capacity. In his capacity as a shareholder, a director may hold voting rights in the company. One consideration regarding the removal of a director from office is their removal by shareholders in circumstances where the directors are themselves shareholders in the company and hold weighted votes. This article appraises whether, under the South African Companies Act 71 of 2008, a shareholding-director who holds shares with weighted votes would validly and lawfully be able to block his removal from office by the company's shareholders. This article makes suggestions regarding the use of weighted votes to block the removal of directors from office, and calls for an important amendment to the South African Companies Act 71 of 2008 to prevent weighted votes being used as a device to block the removal of directors from office.
Keywords
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- Research Article
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- Copyright © SOAS, University of London 2019
Footnotes
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BA (cum laude), LLB (cum laude), LLM (cum laude) (Witwatersrand), LLD (Unisa). Senior lecturer, Department of Mercantile Law, School of Law, University of South Africa; attorney; notary public of the High Court of South Africa. This article is based on sections of the author's doctoral thesis.
References
1 On sec 220 of the South African Companies Act 61 of 1973, see Stewart v Schwab 1956 (4) SA 791 (T); Swerdlow v Cohen and Others 1977 (3) SA 1050 (T); Amoils v Fuel Transport (Pty) Ltd 1978 (4) SA 343 (W); Barlows Manufacturing Co Ltd and Others v RN Barrie (Pty) Ltd and Others 1990 (4) SA 608 (C); and James North (Zimbabwe) (Pvt) Ltd v Mattinson 1990 (2) SA 229 (ZHC).
2 Sec 71(1) states: “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).” Sec 71(2) sets out the procedures that must be followed before the shareholders may consider such a resolution.
3 Under sec 71(3), the board of directors, other than the director concerned, must determine the matter by resolution, and may remove a director whom it has determined to be ineligible or disqualified, incapacitated, or negligent or derelict, as the case may be.
4 Bailey, RG “Shareholder control over management: The removal of directors” (1974) 20 McGill Law Journal 85Google Scholar at 86; Bebchuk, LA “The myth of the shareholder franchise” (2007) Virginia Law Review 675Google Scholar at 680.
5 In many small private companies the directors and the shareholders are the same persons. In larger companies though, as famously documented by Berle and Means in their landmark study in 1932 (AA Berle and GC Means The Modern Corporation & Private Property (1947, The Macmillan Company)), ownership and control of companies do not vest in the same persons. The effect of the split in ownership and control is that a large body of shareholders has been created who exercise virtually no control over the wealth that they have contributed to the enterprise, while the ownership interest held by the controlling group, being the directors, is only a very small fraction of the total ownership of the company. A detailed discussion of the separation of ownership and control is beyond the scope of this article, but see further: Sullivan, GR “The relationship between the board of directors and the general meeting in limited companies” (1977) 93 Law Quarterly Review 569Google Scholar at 579; Fama, EF and Jensen, MC “Separation of ownership and control” (1983) 26/2 The Journal of Law and Economics 301CrossRefGoogle Scholar at 301; Pinto, AR “Corporate governance: Monitoring the board of directors in American corporations” (1998) 46 The American Journal of Comparative Law 317CrossRefGoogle Scholar; Hill, J “Visions and revisions of the shareholder” (2000) 48 American Journal of Comparative Law 39CrossRefGoogle Scholar at 39; Bainbridge, SM Corporate Law (2nd ed, 2009, Thomson Reuters Foundation Press) at 72–75Google Scholar; Steyn, B and Stainbank, L “Separation of ownership and control in South African-listed companies” (2013) 16/3 South African Journal of Economic and Management Sciences 316CrossRefGoogle Scholar at 316; Austin, RP and Ramsay, IM Ford, Austin and Ramsay's Principles of Corporations Law (16th ed, 2015, LexisNexis Butterworths) at 238Google Scholar; French, D, Mayson, S and Ryan, C Mayson, French & Ryan on Company Law (32nd ed, 2015, Oxford University Press) at 433–34CrossRefGoogle Scholar; and Hannigan, B Company Law (4th ed, 2016, Oxford University Press) at 183–86Google Scholar.
6 BJ Cartoon “The removal of company directors” (1980) The Journal of Business Law 17 at 17.
7 South African Companies Act, sec 66(1) empowers the board of directors of a company to manage the company's business and affairs, save to the extent that the act or the company's memorandum of incorporation provides otherwise. See further Kaimowitz v Delahunt and Others 2017 (3) SA 201 (WCC), paras 12–13.
8 Cartoon “The removal of company directors”, above at note 6.
9 493 A.2d 946 (Del 1985) at 959.
10 473 A.2d 805 (1984) at 811.
11 Cassim, R “Governance and the board of directors” in Cassim, FHI (ed) Contemporary Company Law (2nd ed, 2012, Juta) 400Google Scholar at 445.
12 Under the South African Companies Act, sec 71(1), 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. Sec 1 defines an “ordinary resolution” as meaning a resolution adopted with the support of more than 50% of the voting rights exercised on the resolution, or a higher percentage as contemplated in sec 65(8).
13 See id, sec 65(8), which explicitly prohibits a company's memorandum of incorporation from increasing the threshold to pass an ordinary resolution for the removal of a director under sec 71.
14 2012 (5) SA 497 (WCC), para 26.
15 [1970] AC 1099 (HL).
16 “‘Weighted’ or ‘loaded’ votes in private companies” (1977) The South African Company Law Journal D5 at D5.
17 Cassim, FHI “The division and balance of power between the board of directors and the shareholders: The removal of directors” (2013) 29/1 Banking and Finance Law Review 151Google Scholar at 164. See further on loaded voting rights: Kershaw, D Company Law in Context: Text and Materials (2nd ed, 2012, Oxford University Press) at 713Google Scholar; French, Mayson and Ryan Mayson, French & Ryan on Company Law, above at note 5 at 95–96; Davies, PL and Worthington, S Gower Principles of Modern Company Law (10th ed, 2016, Sweet & Maxwell) at 380Google Scholar; and Hannigan Company Law, above at note 5 at 96–97.
18 “‘Weighted’ or ‘loaded’ votes”, above at note 16.
19 Model Business Corporation Act with Official Comments and Reporter's Annotations (vol 2, 4th ed, 2013, American Bar Association) at 7-115.
20 “‘Weighted’ or ‘loaded’ votes”, above at note 16.
21 South African Companies Act, sec 63(6). Under sec 63(7) a polled vote must be held on a particular matter if a demand for such a vote is made by at least five persons having the right to vote on that matter, or by a person or persons who together are entitled to exercise at least 10% of the voting rights entitled to be voted on that matter.
22 Id, sec 1 defines a “voting right” as meaning, with respect to any matter to be decided by a company, the rights of any holder of the company's securities to vote in connection with that matter (in the case of a profit-company) or the rights of a member to vote in connection with the matter (in the case of a non-profit company). “Voting power” constitutes the voting rights that may be exercised by a particular person in connection with a matter to be decided by a company, as a percentage of all such voting rights: ibid.
23 The Delaware General Corporation Law, sec 212(a) states: “Unless otherwise provided in the certificate of incorporation … each stockholder shall be entitled to 1 vote for each share of capital stock held by such stockholder.”
24 This section provides that, subject to any rights or restrictions attached to any class of shares, at a meeting of members of a company with a share capital, on a show of hands each member has one vote, and on a poll each member has one vote for each share they hold. It follows that a particular class of shares may have specific rights attached to it, such as loaded voting rights.
25 (1994) 13 ACSR 42 at 45–46.
26 Id at 45.
27 Id at 45–46.
28 Armstrong, S “Australia: Company law: Weighted voting rights” (1995) 6/5 International Company and Commercial Law Review 96Google Scholar at 97.
29 Ibid.
30 See the UK Companies Act of 2006, sec 284(4), which provides that the provisions of sec 284 are subject to any provision of the company's articles of association.
31 JSE Listings Requirements, para 4.19.
32 Id, para 4.20.
33 The ASX Listing Rules are enforceable against listed entities under the Australian Corporations Act of 2001 (see secs 793C and 1101B).
34 This rule came into force on 16 May 2014. The UK Listing Rules are a set of regulations that apply to a company listed on a UK stock exchange and are subject to the oversight of the UK Listing Authority.
35 The distinction between a standard listing and a premium listing was introduced in the UK in 2010. While the shares listed with a standard listing must comply with the minimum standards, shares listed with a premium listing must comply with more onerous standards.
36 See NYSE Listed Company Manual, sec 313.00(A) (voting rights policy).
37 Id, sec 313.00(A).
38 On 24 April 2018 the Stock Exchange of Hong Kong Limited announced that a new chap 8A on weighted voting rights would be inserted into the Listing Rules of the Stock Exchange of Hong Kong Limited. The rules took effect on 30 April 2018.
39 Id, rule 8A.10. Refer further to id, chap 8A for the other conditions and safeguards regulating weighted voting rights in companies listed on that stock exchange. For example: the weighted voting structure must be share based (rule 8A.07); shareholders with non-weighted voting rights must be entitled to cast at least 10% of the votes that are eligible to be cast on resolutions at the listed issuer's general meetings (rule 8A.09); issuers with weighted voting rights will be required to include the warning, “A company controlled through weighted voting rights” on the front page of all corporate documents (rule 8A.37); and issuers with weighted voting rights will be required to describe in their listing documents and periodic financial reports, circulars, notifications and announcements their weighted voting rights structure, the rationale for having a weighted voting rights structure and the associated risks for shareholders (rule 8A.37).
40 J Griffiths and C McKenzie “Hong Kong Stock Exchange brings in landmark changes to allow weighted voting rights shares” (27 April 2018) Asia Pacific Law Alert, available at: <https://www.nixonpeabody.com/-/media/Files/Alerts/2018-April/HK-Stock-Exchange-weighted-voting-right%20structures.ashx> (last accessed 1 May 2019); Hong Kong Exchanges and Clearing Limited “Concept paper: Weighted voting rights” (August 2014) at 7–9, available at: <http://www.hkex.com.hk/-/media/HKEX-Market/News/Market-Consultations/2011-to-2015/August-2014-Weighted-Voting-Rights/Consultation-paper/cp2014082.pdf> (last accessed 1 May 2019).
41 South African Companies Act, sec 73(5)(c).
42 See id, sec 15(1)(a) and (b), essentially providing that each provision in a company's memorandum of incorporation must be consistent with the Companies Act and is void to the extent that it contravenes, or is inconsistent with, the Companies Act.
43 Or App 649 P.2d 598.
44 Id at 601.
45 Above at note 15.
46 Emphasis added. Table A, part 1, reg 62 provided: “Subject to any rights or restrictions for the time being attached to any class or classes of shares, on a show of hands every member present in person shall have one vote, and on a poll every member shall have one vote for each share of which he is the holder.”
47 The UK Companies Act of 2006, sec 168(1) provides that a director of a company may be removed at any time by an ordinary resolution of shareholders, despite anything contained in any agreement between the director and the company.
48 This decision of Ungoed-Thomas J, dated 3 December 1968, does not appear to have been reported. This quote is taken from the judgment of Harman LJ in the decision of the UK Court of Appeal in Bushell v Faith and Another [1969] 1 All ER 1002 at 1004 and from the judgment of Lord Upjohn in the House of Lords in Bushell v Faith, above at note 15 at 1107–08.
49 Bushell v Faith and Another, id at 1003, per Harman LJ.
50 Id at 1006, per Russell LJ.
51 Bushell v Faith, above at note 15 at 1109, per Lord Upjohn.
52 Ibid.
53 Id at 1110, per Lord Donovan.
54 Id at 1108.
55 Above at note 48 at 1104, per Russell LJ.
56 Bushell v Faith, above at note 15 at 1105, per Lord Reid.
57 Ibid.
58 Ibid.
59 Id at 1106.
60 Ibid.
61 Lord Morris of Borth-y-Gest was referring here to the judgment of the court a quo, per Ungoed-Thomas J, which had found in favour of Bushell.
62 Bushell v Faith, above at note 15 at 1106.
63 See Muir v Lampl and Another [2005] 1 HKLRD 338 at 345; Boros, E “Virtual shareholder meetings: Who decides how companies make decisions?” (2004) 28 Melbourne University Law Review 265Google Scholar at 283; and Dignam, A Hicks & Goo's Cases and Materials on Company Law (7th ed, 2011, Oxford University Press) at 334Google Scholar.
64 Cartoon “The removal of company directors”, above at note 6 at 19–20.
65 Above at note 48.
66 Beuthin, RC “A director firmly in the saddle” (1969) 86 South African Law Journal 489Google Scholar at 489.
67 Hahlo, HR “Restrictions on the alteration of articles” (1969) 86 South African Law Journal 349Google Scholar at 351.
68 Above at note 63.
69 Id at 346, per Lam J. The Companies Ordinance (cap 32), sec 157(B) provided: “A company may by ordinary resolution remove a director before the expiration of his period of office, notwithstanding anything in its memorandum or articles or in any agreement between it and him: Provided that this subsection shall not, in the case of a private company, authorize the removal of a director holding office for life on the commencement of the Companies (Amendment) Ordinance 1984 (6 of 1984).”
70 Muir v Lampl, ibid.
71 Id at 347.
72 Ibid.
73 Ibid.
74 Ibid.
75 Id at 344 and 347.
76 Bushell v Faith, above at note 15 at 1110–11.
77 Davies and Worthington Gower Principles of Modern Company Law, above at note 17 at 380. A quasi-partnership usually involves a small private company, which in effect runs as a partnership between the shareholders. The shareholders agree to go into a business venture together on the basis of an agreement or understanding that all the shareholders will participate in the management of the company's business and that they will all be appointed as directors of the company. See Ebrahimi v Westbourne Galleries Ltd and Others [1972] 2 All ER 492 (HL) at 500; Barnard v Carl Greaves Brokers (Pty) Ltd and Others and Two Other Cases 2008 (3) SA 663 (C), para 11; Croly v Good and Others [2010] EWHC 1 (Ch), paras 9 and 89–93; De Sousa and Another v Technology Corporate Management (Prop) Ltd and Others 2017 (5) SA 577 (GJ), para 47; Fitzpatrick, PG “Re Westbourne Galleries Ltd” (1971) 22/1 Northern Ireland Legal Quarterly 60Google Scholar at 60; Kershaw Company Law in Context, above at note 17 at 674–79; and French, Mayson and Ryan Mayson, French & Ryan on Company Law, above at note 5 at 71.
78 Rutabanzibwa, AP “What is golden in the golden share? Company law implications of privatisation” (1996) 17/2 Company Lawyer 40Google Scholar at 43.
79 Birds, J et al. Boyle and Birds’ Company Law (9th ed, 2014, Jordan Publishing)Google Scholar at 563.
80 See further Botha, D “Some aspects concerning the removal of directors” (1973) De Rebus Procuratoriis 465Google Scholar at 467; Keay, A “Company directors behaving poorly: Disciplinary options for shareholders” (2007) Journal of Business Law 656Google Scholar at 672–73; Kershaw Company Law in Context, above at note 17 at 227; and French, Mayson and Ryan Mayson, French & Ryan on Company Law, above at note 5 at 446.
81 Cassim “The division and balance of power”, above at note 17 at 164.
82 Ibid.
83 Collier, JG “Company - Power to remove director by ordinary resolution - Weighted voting - Whether ordinary resolution” (1970) 28 The Cambridge Law Journal 41CrossRefGoogle Scholar at 42.
84 Schmitthoff, CM “House of Lords sanctions evasion of Companies Act” (1970) The Journal of Business Law 1Google Scholar at 2.
85 Id at 1.
86 Prentice, DA “Removal of directors from office” (1969) 32 Modern Law Review 693Google Scholar at 696.
87 Kaye, RG “A mockery of the law?” (1970–71) 2 Kingston Law Review 63Google Scholar at 66.
88 Griffin, S Company Law Fundamental Principles (4th ed, 2006, Pearson / Longman)Google Scholar at 288. For further discussion of Bushell v Faith, see Botha “Some aspects concerning the removal of directors”, above at note 80 at 467; “‘Weighted’ or ‘loaded’”, above at note 16; “‘Weighted’ votes again” (1977) The South African Company Law Journal D17; Rutabanzibwa “What is golden in the golden share?”, above at note 78 at 42–43; Boros “Virtual shareholder meetings”, above at note 63 at 282–84; Cassim “The division and balance of power”, above at note 17 at 164–65; Kershaw Company Law in Context, above at note 17 at 223–28; Birds et al Boyle and Birds’ Company Law, above at note 79 at 562–63; French, Mayson and Ryan Mayson, French & Ryan on Company Law, above at note 5 at 95–96 and 446; Davies and Worthington Gower Principles of Modern Company Law, above at note 17 at 380; and Hannigan Company Law, above at note 5 at 174.
89 1977 (1) SA 178 (W) at 184–85.
90 Ibid.
91 Id at 188.
92 Id at 188–89.
93 Bushell v Faith, above at note 15 at 1108.
94 Above at note 48 at 1004.
95 See Griffin Company Law Fundamental Principles, above at note 88 at 288; Keay “Company directors behaving poorly”, above at note 80 at 672–73; Birds et al Boyle and Birds’ Company Law, above at note 79 at 563; and Hannigan Company Law, above at note 5 at 174.
96 As discussed above, listed companies in the UK may not issue shares with loaded voting rights.
97 Griffin Company Law Fundamental Principles, above at note 88 at 288.
98 Dignam Hicks & Goo's Cases and Materials, above at note 63 at 334.
99 Hansard May 2006, vol 681, part 142 at column 826, per Lord Sainsbury of Turville. See further: Kershaw Company Law in Context: Text and Materials, above at note 17 at 223; and S Worthington Sealy & Worthington's Text, Cases and Materials in Company Law (11th ed, 2016, Oxford University Press) at 300.
100 Kaye “A mockery of the law?”, above at note 87 at 65.
101 Cassim Contemporary Company Law, above at note 11 at 448.
102 FHI Cassim “Introduction to the new Companies Act” in id, 1 at 7.
103 For discussion of the substance over form approach and for illustrative purposes in tax law, where anti-avoidance provisions are well-established in South African law, refer to Commissioner for Inland Revenue v Conhage (Pty) Ltd (formerly Tycon (Pty) Ltd) 1999 (4) SA 1149 (SCA); Commissioner for the South African Revenue Service v NWK Ltd 2011 (2) SA 67 (SCA); and Sasol Oil v CSARS (923/2017) [2018] ZASCA 153 (9 November 2018).
104 South African Companies Act, sec 1.
105 See “Memorandum on the objects of the Companies Bill, 2008” in the Companies Bill [B 61D-2008] para 5.
106 See South African Companies Act, sec 15(2)(a)(iii), which provides that a company's memorandum of incorporation may impose on the company a higher standard, greater restriction, longer period of time or any similarly more onerous requirement than would otherwise apply to the company in terms of an unalterable provision of the act.
107 Ibid. These types of provisions usually have the introductory phrase “unless prohibited by its memorandum of incorporation” or “except to the extent that the memorandum of incorporation of a company provides otherwise”.
108 MF Cassim “Formation of companies and the company constitution” in Cassim (ed) Contemporary Company Law, above at note 11, 105 at 126.
109 Cassim “The division and balance of power”, above at note 17 at 165.
110 The recommended changes are shown in italics.
111 Above at note 15.