July 17, 2026
When disputes arise in private companies, one of the first questions shareholders ask is whether a problematic director or shareholder can simply be removed from the company. The answer depends on the capacity in which that individual is involved.
South African company law draws a clear distinction between a person's role as a director and that person's status as a shareholder. Although the same individual may occupy both positions, the legal consequences attached to each are fundamentally different. A director may, in appropriate circumstances, be removed from office or even declared delinquent. A shareholder, however, enjoys proprietary rights in his or her shares and cannot ordinarily be deprived of those rights merely because of misconduct.
Understanding this distinction is essential when considering the remedies available under the Companies Act 71 of 2008 (the Act).
Director vs shareholder: two separate capacities
A director manages the affairs of the company and owes fiduciary and statutory duties to the company.
A shareholder owns shares in the company and exercises rights attached to those shares.
The same person may hold both positions. Therefore, removing a person as a director does not automatically remove their shareholding, and vice versa.
What is a delinquent director?
Section 162 of the Act allows a court to declare a director delinquent in specified circumstances. The Act provides for this serious remedy where directors abuse their position or engage in serious misconduct. A court must declare a director delinquent if, amongst other things, the director:
- grossly abused the position of director;
- took personal advantage of information or opportunities belonging to the company;
- intentionally or by gross negligence inflicted harm on the company;
- acted with gross negligence, wilful misconduct, or breach of trust in carrying out their duties.
The Supreme Court of Appeal recently considered section 162 in Msibithi Investments and Others v African Legend Investment and Others [2025] ZASCA 61. The Court confirmed that where the requirements of section 162(5)(c)(iv) have been established, namely that a director acted with gross negligence, wilful misconduct or breach of trust in the performance of his or her duties, a court is obliged to declare that director delinquent. The judgment reinforces the importance of section 162 as a mechanism for maintaining accountability in corporate governance.
A declaration of delinquency is one of the most severe sanctions available under South African company law. It is not intended for mere mistakes in business judgment or ordinary negligence. Rather, it targets conduct demonstrating a fundamental abuse of the office of director.
How do you remove a delinquent director?
There are generally two routes.
1. Removal by shareholders – Section 71(1) of the Act
Section 71 provides shareholders with a relatively straightforward mechanism to remove a director by ordinary resolution. Unlike a delinquency application, removal under section 71 does not require proof of misconduct. In many cases the provision is used simply because shareholders have lost confidence in the director's ability to continue serving on the board.
This is often the quickest and most practical route.
The procedure generally involves giving proper notice of the meeting informing the director of the proposed removal and affording the director a reasonable opportunity to make representations. An ordinary resolution has to be passed (more than 50% of votes cast, unless the Memorandum of Incorporation (MOI) provides otherwise).
Importantly, no misconduct needs to be proved. Shareholders may remove a director even if they simply no longer have confidence in that individual.
2. Court declaration of delinquency – Section 162 of the Act
Where the director's conduct is particularly serious, an interested person may apply to court for a declaration of delinquency. Interested parties may include shareholders, directors, the company itself, creditors, trade unions or other persons with a legitimate interest in the company.
An application for delinquency is brought in the High Court by a person entitled to seek relief under section 162. In practice, the success of such an application will usually depend on the quality of the available evidence. Documentary proof of unauthorised payments, diversion of corporate opportunities, undisclosed conflicts of interest, fraudulent conduct, false reporting or breaches of fiduciary duty will often feature prominently in these proceedings.
The court must then determine whether one or more of the statutory grounds for delinquency have been established. If so, a declaration of delinquency may follow, together with the consequences prescribed by the Act.
Can a delinquent director continue to act as a director?
Generally not. A person who has been declared delinquent becomes disqualified from serving as a director for the duration of the court order. Internal governance documents frequently echo this statutory position and provide that a person declared delinquent may not act as a director.
Can you remove the person as a shareholder?
This is where many shareholders become frustrated. The Act does not generally permit a court or the company simply to expel a shareholder because that shareholder has acted improperly. A shareholder's ownership rights are proprietary rights and enjoy substantial legal protection.
Accordingly, removing a person as a director does not remove their shares or shareholding. The former director may continue to own shares and continue receiving dividends and exercising voting rights unless another legal mechanism exists.
How can a shareholder be compelled to exit?
A shareholder can typically only be compelled to dispose of shares where one of the following exists:
1. Shareholders' agreement or MOI provisions
Many well-drafted shareholders' agreements include:
- bad leaver provisions (misconduct, fraud, breach of fiduciary duty, gross negligence, dishonesty or similar cause);
- compulsory transfer provisions;
- call options;
- misconduct triggers;
- director removal triggers.
Where such provisions exist, the shareholder may be required to sell their shares upon specified events.
2. Oppression remedy (Section 163 Act)
Section 163 does not create a direct right to expel a shareholder. However, where oppressive or unfairly prejudicial conduct has been established, the court enjoys a wide discretion to fashion appropriate relief. Depending on the circumstances, that relief may include an order requiring one shareholder's interest to be acquired by another, thereby facilitating an exit from what has become a dysfunctional corporate relationship.
3. Court-ordered buy-out
In exceptional circumstances, the court may order a shareholder's interests to be purchased as part of broader remedial relief under the Act.
4. Sale by agreement
The most commercially practical solution often remains a negotiated exit.
Practical example
Consider the example of a director-shareholder who diverts company funds for personal purposes, conceals material transactions from fellow directors and repeatedly breaches fiduciary duties. In those circumstances, the remaining shareholders may remove the individual from the board under section 71 and may also seek a declaration of delinquency under section 162. They may additionally pursue damages claims arising from the misconduct.
Whether the individual can also be compelled to dispose of his or her shares will depend largely on the existence of suitable provisions in the shareholders' agreement or memorandum of incorporation, or on whether a court is prepared to grant appropriate relief under section 163.
However, in the absence of a contractual or statutory basis, the mere fact that the director has acted improperly does not automatically terminate that person's shareholding.
Conclusion
Misconduct by a director does not necessarily translate into the loss of shareholding rights. The Act distinguishes between management rights and ownership rights, and the remedies available in respect of each are fundamentally different.
Sections 71 and 162 provide effective mechanisms to remove directors and, where appropriate, to declare them delinquent. Shareholders seeking to remove a problematic shareholder face a more difficult task. Unless the memorandum of incorporation, shareholders' agreement or a court order provides otherwise, share ownership cannot simply be terminated because the shareholder has behaved improperly.
For that reason, carefully drafted bad-leaver, compulsory transfer and buy-out provisions remain critical in closely held companies. Without them, a company may succeed in removing a director while remaining locked into a commercial relationship with that same person as a shareholder.
