Company Directors: Elected, Appointed?

Article by: Shelf Company Warehouse (Pty) Ltd.

For decades we have become accustomed to refer to the way in which a person becomes a director of a company, as the person’s “appointment” to such a position. Section 209 of our previous Companies Act of 1973 details that the number of directors may be determined by the subscribers to the memorandum of a company – and appointed by them. Section 210 of this Act then describes how directors of a company are subsequently appointed, while section 211 requires that a company, after the appointment of a director, should lodge the prescribed documentation with the Registrar. In many other sections of this Act, references are made to the appointment of directors.

For decades this was never an issue, namely the description of the verb to indicate the process of placing someone in the office of a director.

Now, it appears that this could in fact be an issue:

Section 66 of the new Companies Act, 2008 describes how the directors of a company may not only beappointed, but also elected. Subsection 4(a) provides for the appointment in the Memorandum of a company of directors and in the same subsection of the appointment or election of alternate directors. Section 66(6) makes particular mention of “The election or appointment of a person as a director…”

Section 68(1) describes that other than the directors so appointed as mentioned in section 66(4), “each” director “must be elected” by the shareholders of the company. The legislator describes “appointed” and “elected”, as one can see, as two different procedures. The legislator describes them as alternatives – a director is either appointed or elected.

Why this is an issue whatsoever, can be asked. Why can these terms, despite the differentiation that the legislator draws between them, not both be loosely used as the process for placing a person in the position of a director of a company?

It is suggested that the answer lies in the different ways in which directors are either appointed or elected.

Appointment of directors:

As far as can be established, there are three different means of appointing a director mentioned in the Act, namely:

The option of the provision in the Memorandum of a company for the direct appointment or removal of a director by a particular person named in, or determined in terms of, the Memorandum, in accordance with section 66(4)(a)(i). An example would be a stipulation that Mr Jones (a person who is named in the Memorandum) would be able to appoint or remove 2 directors to a company. Alternatively, that the majority shareholder (a person who is determined in terms of the Memorandum) for instance, may appoint or remove a director of the company.
The provision in the Memorandum of a person to be an ex officio director of a company, as provided for in section 66(4)(b)(ii). Example: one of the directors of a state state-owned company shall always be the Minister of a certain State Department.
The appointment of a director by the board to fill a vacancy on a temporary basis, until the vacancy has been filled by an election by shareholders, in terms of the provision of section 68(3).
As far as the first two categories are concerned, no democratic process is involved, while only a limited democratic process is involved in the third category: either a director is appointed or removed by a particular person who has the sole discretion to do so, or a person is appointed by a select few persons, who also have the sole discretion in this regard.

Election of directors:

Section 66(4)(b) and (7) refer to the election of directors while section 68(1), mentioned above, describes how directors are elected by shareholders and section 68(2) suggests a manner of election as an alterable provision, so that a company can detail its own election procedures in its Memorandum. The procedures involve, as can be inferred from the provisions of these two subsections, a democratic election process by shareholders of a company.

The answer to the abovementioned question as to why it is an issue as to whether a director was appointed or elected, is that different procedures and provisions of the Act are involved in the appointment or election of directors.

So what will happen if a director is an appointed director, but appointed via the procedures for the election of a director, and vice versa?

Neither “appoint” or “elect” or similar words are defined in section 1 of the Act, while “director” is only defined as a person who occupies that position, as contemplated in section 66. However, the Act itself, via the procedures set out above, differentiates between these concepts, by describing the different procedures involved for the appointment or election of directors. An appointed director, for instance, cannot be appointed by a resolution of shareholders of a company and an elected director cannot be elected via a direct “election” to this position via, say, a person named in the Memorandum of a company.

It is submitted that for the abovementioned reasons, care should be taken not to confuse these two words, or to use them as if they are synonyms of each other.

But by far the most confusion, in our practical experience, reigns in matters where instruction are given to verify and correct older shareholders agreements to ensure that they align with converted MOI’s and with the new Companies Act. In these agreements shareholders often agree that certain shareholders have the authority to appoint directors in accordance with certain formulae related to the percentage of their shareholding in a company. In our opinion there is nothing with such stipulations – except for the problems that the new Act has now brought about.

The problem is of course that in terms of the abovementioned sections of the Act, and as illustrated, shareholders cannot appoint directors anymore. Shareholders “exercise their voting rights” in the language of section 68(1) in order to elect directors.

Section 15(7) of the Act, the only section in the Act relating to shareholders agreements, provides that shareholders:
“… may enter into any agreement with one another concerning any matter relating to the company, but any such agreement must be consistent with this Act and the Company’s Memorandum of incorporation, and any provision of such an agreement that is inconsistent with this Act or the Company’s Memorandum of Incorporation is void to the extent of the inconsistency.”.

Failure to realise the abovementioned problem when a shareholders agreement is perused to ensure that it aligns with the new Act, could therefore result in the retention of provisions that have now become void. It is superfluous to mention the importance of the rights of a shareholder to gain the contractual authority to elect a director or directors. To have such a valuable asset rendered worthless could be disastrous for a shareholder.

Indeed, the abovementioned wording of section 15(7) could actually add insult to injury to such a prejudiced shareholder: the shareholder will still be bound by the rest of the provisions of the agreement, (section 15(7) only renders the inconsistent clauses of a shareholders agreement void – not the whole of the agreement) while the provisions related to his authority to elect directors, are now void.

This goes even further: the shareholder concerned would most probably have contracted quite differently had he known that his agreement related to the appointment of directors will become void. Now he is trapped in an agreement that obliges him to comply with all his contractual obligations, while a sizeable amount of his rights have disappeared.

But there is in fact provision made in the new Act for the appointment of a director – the question could be raised as to why the provision related to the appointment of directors in a shareholders agreement would not fall under section 66(4)(a)(i).

The problem is that this subsection stipulates that, as quoted above, provision for such appointment must be made in the Memorandum of the company. For instance, if instructions are given to have the shareholders agreement of a company overhauled and to have a new MOI drafted, as is usual, then this issue should be addressed in both these documents. If only the MOI contains provisions related to section 66(4) and the shareholders agreement is not amended, section 15(7), as mentioned, will apply. If only the shareholders agreement is amended, the MOI will not accommodate this issue and the shareholders agreement in our opinion, will be inconsistent with the MOI, in which case section 15(7) will again apply.

We have come across another related problem:

In a certain case a shareholders agreement concluded during the application of the ’73 Act, a stipulation appears that a certain shareholder was authorised to appoint all the directors of a company. Upon review of this agreement for purposes of comparing it with the requirements of the new Act, we noted the contents of section 66(4)(b), which details that: “(A company’s Memorandum of Incorporation) in the case of a profit company…must provide for the election by shareholders of at least 50% of the directors (and 50% of alternate directors)”.

The abovementioned stipulation is therefore inconsistent with the Act and void in accordance with the provision of section 15(7). Moreover, of course, any such provision in a new shareholders agreement is also inconsistent with the new Act – and void.

The provision of section 66(4)(b) are in our opinion, clear and unambiguous – yet we cannot detect any provision in the prescribed MOI Forms relating to the incorporation of profit companies that contain the obligatory inclusion that 50%, at least, of directors must be elected. We are therefore incorporating companies while their MOI’s do not comply with the Act. And what is going to happen in the case of companies where this becomes an issue? How valid will directors’ resolutions be?

If certain of the shareholders of a company have the authority via a shareholders agreement to appoint directors as provided for in section 66(4)(a), then care should be taken that such appointed shareholders do not exceed the requirements of section 66(4)(b), namely that at least 50% of the remaining directors should still be elected. It can be foreseen that this could become an issue that company secretaries, for instance, should be constantly mindful of.

Just a note from us:
We are not stating that some or other legal means may not be found, maybe via:

a court application, to have the abovementioned perceived consequences set aside, or maybe
to have the failure to amend the shareholders agreement and the MOI to avoid the abovementioned results condoned in some way and to have the necessary amendments made retrospectively.
We are merely identifying these serious (in our view) issues that in our opinion, could confront the client and the practitioner. We expect this subject to be raised more and more as time goes by, when these problems reveal themselves in practice.