Jones and Others v Hendrik Frederick Delport and Others [2024] ZAGPPHC 833 (28 August 2024)

Holdings is the owner of the immovable property from which Rand Airport operates, while Management, a wholly-owned subsidiary of Holdings, manages and operates the airport. The shareholders of Holdings include Rand Operators (Pty) Ltd, which holds 50% of the shares, Mayondi Investments (Pty) Ltd with 30%, and Ekurhuleni Metropolitan Municipality with 20%. Rand Operators has approximately 38 shareholders, who are occupants of properties at the airport and conduct business there.

The shareholders' agreement stipulates that Rand Operators can appoint five directors to the board of Holdings, provided these appointees are also directors of Rand Operators, which are appointed by its shareholders. Mayondi and Ekurhuleni are entitled to appoint three and two directors, respectively. The first to third applicants were appointed as directors of Holdings by the shareholders of Rand Operators, while the third to sixth respondents were appointed by Mayondi and Ekurhuleni.

All directors of Holdings also serve as directors of Management. Until February 2023, Stuart Colin Coetzee was the airport manager and a director of both Operators and the companies. In late 2022, irregularities in Coetzee's conduct led to an investigation, resulting in his resignation as a director on February 16, 2023, and subsequent replacement as airport manager.

On April 28, 2023, Coetzee and four other shareholders of Rand Operators demanded a shareholders meeting to remove the first and second respondents as directors of Operators, citing various grounds for their removal. On June 1, 2023, a shareholders meeting was held where the applicants were appointed as directors of Operators, automatically making them directors of Holdings and Management. However, this meeting did not address the removal of the first and second respondents.

On June 9, 2023, the boards of Holdings and Management adopted resolutions to initiate civil action against Coetzee for alleged financial mismanagement, fraud, and theft, which were implemented following a forensic investigation that also led to criminal charges against him.

On July 18, 2023, the first applicant convened a board meeting of Operators for July 20, 2023, to consider the demands for the removal of the first and second respondents. The board adopted a resolution to hold a shareholders meeting on August 7, 2023, to discuss this removal.

On July 25, 2023, the first respondent called a board meeting for July 27, 2023, to consider removing the applicants as directors of the companies under section 71(3)(b) of the Companies Act. However, the meeting was non-quorate and rescheduled for August 3, 2023. At this rescheduled meeting, resolutions were adopted to remove the applicants as directors, which became the subject of the applicants' review.

On August 7, 2023, the first and second respondents were removed as directors of Operators during the shareholders meeting. The first and second respondents later contended that this meeting was invalid and sought urgent interim relief, which was granted on September 1, 2023. An application to set aside the resolutions from the shareholders meeting is still pending.

The removal of the applicants was based on allegations that they were negligent and derelict in their duties as directors, which they contested, leading to the current review application under section 71(5) of the Companies Act.

The ratio decidendi of the case is that the board of directors of a company must provide sufficient evidence to substantiate claims of negligence or dereliction of duty when removing a director under section 71(3)(b) of the Companies Act. The court determined that the conduct of the applicants, which was cited as the basis for their removal, did not constitute neglect or dereliction of their duties as directors of the companies. Furthermore, the court emphasised that the removal process must adhere to the procedural requirements set out in the Companies Act, including providing adequate notice and an opportunity for the affected directors to respond. The court concluded that the determination to remove the applicants was invalid due to the lack of evidence supporting the allegations against them, thereby reinforcing the principle that directors must be afforded due process and that their rights must be protected in corporate governance matters.

The case illustrates several general principles of law relevant to corporate governance, the duties of directors, and the procedural requirements for their removal under the Companies Act. These principles include:

1. Duties of Directors: Directors of a company have a fiduciary duty to act in the best interests of the company. This includes exercising their powers with care, skill, and diligence, as outlined in section 76 of the Companies Act. Directors must not use their positions to gain an advantage for themselves or others at the expense of the company.

2. Standard of Care and Skill: The law requires directors to perform their functions with the degree of care, skill, and diligence that may reasonably be expected of a person carrying out similar functions. This standard is contextual and takes into account the director's knowledge, skill, and experience.

3. Procedural Fairness: The removal of a director must follow a fair and transparent process. Section 71(4) of the Companies Act mandates that a director facing removal must be given adequate notice of the meeting, a copy of the proposed resolution, and a statement of the reasons for the resolution. The director must also be afforded a reasonable opportunity to present their case before any decision is made.

4. Burden of Proof: In cases where a director is accused of negligence or dereliction of duty, the burden of proof lies with the board of directors making the determination. The board must provide sufficient evidence to substantiate any claims against the director, and mere allegations or speculation are insufficient to justify removal.

5. Right to Review: The Companies Act provides a mechanism for directors to seek judicial review of their removal under section 71(5). This allows affected directors to challenge the validity of the board's determination, ensuring that their rights are protected and that the decision-making process is subject to oversight by the courts.

6. Corporate Governance and Accountability: The case underscores the importance of accountability in corporate governance. Directors serve at the behest of shareholders, and while they can be removed by the board, such actions must be justified and conducted in accordance with the law to prevent potential abuse of power.

7. Separation of Roles: The case highlights the distinction between the roles of directors and shareholders. While shareholders have the ultimate authority to remove directors, the board must adhere to statutory procedures when making determinations about a director's conduct, ensuring that the process is not unduly influenced by personal interests or conflicts.

8. Protection of Directors' Rights: The principles of legality and the rule of law require that any exercise of power by the board must be lawful and justifiable. This includes safeguarding the rights of directors against arbitrary or capricious decisions that could harm their reputation and future prospects.

These principles collectively emphasize the need for transparency, fairness, and accountability in corporate governance, ensuring that directors are held to high standards while also protecting their rights in the decision-making process.

The court applied the general principles of law to the facts of the case by closely examining the procedural and substantive aspects of the removal of the applicants as directors.

Firstly, the court assessed whether the board of directors had adhered to the procedural requirements set out in section 71 of the Companies Act. It found that the applicants were provided with notice of the meeting, copies of the proposed resolutions, and a statement of reasons for their removal. However, the court emphasised that the board's determination must be supported by sufficient evidence of negligence or dereliction of duty, as required by section 71(3)(b).

The court scrutinised the allegations made against the applicants, which included claims that they had acted in a manner that was detrimental to the companies and supportive of Coetzee, the former airport manager. The court found that the conduct cited by the respondents did not constitute neglect or dereliction of duty, particularly since the applicants had not been directors at the time of the actions in question. The court noted that the applicants' support for the removal of the first and second respondents as directors of Operators was in their capacity as representatives of shareholders, and thus did not breach their duties as directors of the companies.

Furthermore, the court highlighted the importance of the burden of proof resting on the board to substantiate its claims against the applicants. It concluded that the board's allegations were largely speculative and lacked concrete evidence. The court reiterated that the removal process must not only comply with procedural requirements but also be based on a valid and substantiated rationale.

Ultimately, the court found that the board of directors of the seventh and eighth respondents could not validly determine that the applicants were negligent or derelict in their duties. As a result, the court ruled that the determinations made at the board meeting on August 3, 2023, to remove the applicants were invalid.

The case was finally decided in favor of the applicants. The court granted an order to review and set aside the determinations of the boards of directors to remove the applicants as directors. The applicants were reinstated as directors of the companies, and the Companies and Intellectual Property Commission was directed to amend its records accordingly. Additionally, the first to eighth respondents were ordered to pay the costs of the application on a scale B basis.

In its reasoning process, the court referred to several case law and authorities to support its conclusions regarding the removal of directors and the applicable legal principles. Notably, the court cited the following cases and legal principles:

1. Pityana v Absa Group Limited 2024 (1) SA 491 (GP) - This case was referenced to discuss the nature of the review process under section 71(5) of the Companies Act. The court in Pityana emphasised that the review process allows for a complete reconsideration of the board's determination, rather than being limited to procedural correctness. The principle established is that the court has the authority to assess both the procedural and substantive aspects of the board's decision.

2. Wait v Marais 2022 JDR 3202 (ECP) - The court relied on this case to interpret the term "review" in section 71 of the Companies Act. The court in Wait concluded that the review should be understood in a purposive manner, considering the potential consequences of a director's removal and the need for adequate safeguards for the rights of the affected director. This case reinforced the idea that the court should undertake a comprehensive review of the board's determination.

3. Nel NO v The Master 2005 (1) SA 276 (SCA) - This case was cited to illustrate the different types of review available in South African law, particularly the statutory review type that combines aspects of both review and appeal. The court highlighted that the review process is not restricted to cases of irregularity but allows for a broader examination of the decision-making process.

4. Fedsure Life Assurance Ltd v Greater Johannesburg Transitional Metropolitan Council 1999 (1) SA 374 (CC) - This case was referenced to discuss the principle of legality, which governs the exercise of public power. The court noted that the exercise of power must comply with the Constitution and the doctrine of legality, emphasizing the importance of lawful decision-making in corporate governance.

The principles of law relied upon by the court included:

- The requirement for directors to act in the best interests of the company and to exercise their powers with care, skill, and diligence, as outlined in section 76 of the Companies Act.
- The necessity for procedural fairness in the removal of directors, including adequate notice, a statement of reasons, and an opportunity to respond, as mandated by section 71(4).
- The burden of proof resting on the board to substantiate claims of negligence or dereliction of duty when seeking to remove a director.
- The court's authority to conduct a comprehensive review of the board's determination, considering both procedural and substantive aspects, to ensure that the rights of directors are protected and that the decision-making process is lawful and justifiable.

These authorities and principles collectively informed the court's decision to set aside the removal of the applicants as directors, reinforcing the importance of due process and accountability in corporate governance.