An analysis of directors' fiduciary duties in the removal of a director from office

Abstract

The Companies Act 71 of 2008 (“the Companies Act”) introduced a provision into South African law that for the first time permits the board of directors to remove another director from office. This provision is contained in section 71(3). This article argues that when the board of directors exercises its power under the Companies Act to remove a director from office it may not breach its fiduciary duties to the company. The directors’ specific fiduciary duties which may apply when the board removes a director from office are explored. This article further examines the consequences of a director breaching his fiduciary duties in removing a board member from office. The question whether such a director runs the risk of incurring personal liability for removing a director in breach of his fiduciary duties is discussed. In addition, the controversial question whether an improperly removed director may be reinstated to office, is also canvassed. The pivotal and contentious English case of Lee v Chou Wen Hsien (“Lee”), in which the court did not reinstate a director who had been wrongly removed by the board – with ulterior motives and in breach of their fiduciary duties – is critically analysed. In light of section 5(2) of the Companies Act, which provides that a court interpreting or applying the Companies Act may consider foreign law to the extent that it is appropriate, this article analyses whether the decision in Lee would be of persuasive authority in South African law. In addition, the article investigates whether any distinctions may be drawn between the applicable company law principles in the United Kingdom on the removal of company directors, and the Companies Act. Finally, this article makes some recommendations relating to the fiduciary duties of directors in removing fellow board members from office.