Introduction
I have received many inquiries on how a vacancy on a company’s board of directors may be filled in the event of the death of a director. I explain below my views on the possible scenarios.
Provisions of the Companies and Other Entities Act (Chapter 24:31) or “COBE Act”
According to section 203(1) of the COBE Act a vacancy on a board of directors shall be filled by election at the next general (shareholders or members) meeting at which directors are to be elected, except that the company’s articles of association may provide that the board may fill such vacancy until such time, in which case it may do so subject to section 203(2).
So, a company’s articles of association may (not necessarily will) have provisions which allow the surviving directors to fill in any vacancies on the board.
In terms of section 203(2) of the COBE Act if at any time vacancies on a board (of directors) equal twenty – five (25) per centum or more of the total number of board seats, the board shall convene an extraordinary shareholder meeting within two (2) months after that event occurs, for purposes (of) filling the vacancies.
According to section 203(4) a director elected to fill a vacancy shall serve until the expiration of the term of the director whose vacancy the person filled.
Extraordinary General Meeting (“EGM”)
An EGM is convened in terms of sections 168 and 169 of the COBE Act read together with the company’s articles of association. Voting is done in terms of section 170 read together with the company’s articles. The situation becomes complex if the surviving shareholders hold less than 50% shares or voting rights as they may not have a quorum.
Where a director is not a shareholder
In this case shareholders have the right to replace a director who has passed on. My view is that section 203 of the COBE Act applies. Most articles of association of companies specify the rights of shareholders to appoint or remove directors and procedures to be followed.
Where a director who holds indirect shareholding dies
In this case the director holds shares not in his or her name but through a special purpose vehicle (“SPV”) such as a company or trust. The shareholder will therefore be the SPV, not the individual director. The passing on of the director will not directly affect shareholding in the company. My view is that the SPV, as the shareholder, will have the right to participate in the replacement of the deceased director, subject to the company’s articles.
Where a director who is a direct shareholder in the company dies
This situation is quite prevalent especially in small to medium companies. The situation can be even more complex or chaotic when surviving directors attempt to make manoeuvres that are viewed as prejudicial to the estate of the deceased director who was a shareholder.
Deceased estate
Upon the passing on of the director who is a shareholder, his or her shares become part of his or her deceased estate. My view is that the administrator of the estate of the deceased director – shareholder has the authority to participate in the replacement of the deceased director, subject to the company’s articles. The surviving directors and shareholders are advised to liaise with the estate administrator or family of the deceased.
Articles of Association
The surviving shareholders and directors should read the company’s articles of association or shareholders’ agreement on the replacement of the deceased director if that is covered otherwise section 203 of the COBE becomes applicable.
Treatment of shares upon death
The company’s articles or shareholders’ agreement may provide for the treatment of shares of the deceased member, such as the right of surviving shareholders to buy the shares, and this may impact on the replacement of the deceased director who was a shareholder.
Conclusion
The replacement of a deceased director should be done lawfully to avoid the board being declared improperly constituted and therefore its decisions or actions having no force or effect.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional
Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), CA(Z), MBA(EBS, UK) is a legal practitioner / conveyancer, chartered accountant, corporate rescue practitioner, registered tax accountant, consultant in deal structuring and business valuer. He is also a director with Investacare International (Private) Limited. He writes in his personal capacity. He can be contacted on +263 772 246 900 or gohofisi@gmail.com
