Removal of Directors by Shareholders

Section 71 of the Companies Act governs the removal of directors of companies. A director may be removed either by the shareholders or by the board of directors.

A director can be removed by way of an ordinary resolution passed by the shareholders in a shareholders’ meeting, despite anything to the contrary in the company’s Memorandum of Incorporation or any shareholders agreement (notably subject to strict adherence with the notice and procedure requirements provided for in the Companies Act is required). This is an “unalterable provision” of the Companies Act as this right cannot be altered or contracted out of (e.g. by way of a shareholders agreement).

In the absence of fraud or bad faith by the shareholders, the removal of a director by shareholders holding a majority vote poses a quandary for certain minority shareholders, who believe that their interests in a company are protected by way of their right to appoint a director to the company’s board. Given that any such director can simply be removed by way of an ordinary majority vote of shareholders, minority shareholders in this position need to be mindful of this section and think carefully about what other protection mechanisms they can employ to protect their rights in respect of the operations of the company.

71. Removal of directors:

(1) 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).

(2) Before the shareholders of a company may consider a resolution contemplated in subsection (1):

(a) the director concerned must be given notice of the meeting and the resolution, at least equivalent to that which a shareholder is entitled to receive, irrespective of whether or not the director is a shareholder of the company; and

(b) the director must be afforded a reasonable opportunity to make a presentation, in person or through a representative, to the meeting, before the resolution is put to a vote.