Shareholders of a company often want their interests represented on the board of directors. In order to ensure such representation, a particular shareholder would want to make sure that nothing can stand in the way of their chosen representative being appointed. In other words, shareholders often want a direct appointment right.
However, in terms of section 66(4)(b) of the Companies Act, No 71 of 2008 (Companies Act), the memorandum of incorporation (MOI) of a company must provide that at least 50% of the directors need to be elected by a resolution of the shareholders. Unlike in the case of a direct appointment, an appointment by election could cause difficulties for a shareholder where co-shareholders may not support or may frustrate the election of a director put forward by that shareholder for election.
The 50% rule implies that some of the directors may be appointed directly (i.e. in a manner other than by way of election of the shareholders). Indeed, the Companies Act provides in section 64(4)(a)(i) that direct appointments can be made by persons who are named in the MOI. As such, a particular shareholder could secure a direct appointment right by being named in the MOI as having that entitlement. However, if more than 50% of a company’s directors were directly appointed by shareholders, the validity of those appointments could be challenged. As an aside, the 50% rule also implies that persons other than the shareholders, such as the board, or even outsiders, could be entitled to directly appoint directors, provided that the MOI provides for this1.
Notwithstanding these restrictions on direct appointment rights, there are ways in which a MOI can be structured to both: (i) comply with the 50% rule and (ii) protect a shareholder’s ability to have its chosen representatives elected to the board. An MOI could provide that a shareholder is entitled to put their chosen director forward for election, and then oblige the remaining shareholders to vote in favour of the election of that director. In such a case, the director would be elected by the shareholders, but if the remaining shareholders decide to vote against that election, they would be in breach of what is effectively a contractual undertaking to vote in favour of the election of the relevant director. The nominating shareholder would therefore have a remedy against the remaining shareholders.
These types of provisions need to be carefully drafted so as to be effective and compliant. Should you need assistance navigating this, contact Boardserv for help.
Footnotes:
- Rehana Cassim ‘Governance and the board of directors’ in Farouk HI Cassim (managing ed), Maleka Femida Cassim and Rehana Cassim (et al) Contemporary Company Law 3 ed (2021) at 568.