REMOVING DIRECTORS OF A COMPANY

a4bThe Companies Act, 71 of 2008, requires that the business and affairs of any company be managed by or under the direction of its board, which has the authority to exercise all of the powers and perform any of the functions of the company, except to the extent that the Companies Act or the company’s Memorandum of Incorporation provides otherwise (section 66(1)). The Companies Act further requires that a company must have at least one director (section 66(2)), and further that only natural persons may serve in that capacity (section 69(7)(a)).

Those individuals occupying the position of directors of a company are therefore responsible for managing the affairs of the company and they do so as custodians on the shareholders behalf. It should be remembered that the directors do not own the company: the company rather is owned by the shareholders and the directors serve therefore to promote the interests of the company, and indirectly therefore the economic interests of the shareholders.

Quite often, in the case of private companies, the directors and shareholders may be the same individuals. However, where the directors have no or limited shareholding interest in the company itself, it may happen that the shareholders may wish to move to have certain directors removed and replaced on the company’s board if e.g. the company’s financial performance or operations otherwise are not satisfactorily conducted according to the shareholders’ liking.

Naturally, a director may be requested to resign under amicable circumstances. However, where a director refuses to resign (and may perhaps have the backing of other shareholders), the question becomes what remedies the aggrieved shareholders still have? It is possible to have these matters regulated in terms of the company’s Memorandum of Incorporation specifically to dictate under which circumstances a director may be removed from the board of a company. It could also be agreed with the director initially by way of a clause in the appointment contract.

Irrespective of whether the Memorandum of Incorporation or an appointment contract addresses the matter specifically, a director may always be removed by way of a majority vote at an ordinary shareholders’ meeting (section 77(1)). Before the shareholders of a company may consider such a resolution though, the director concerned must be given notice of the meeting and the resolution, and 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 (section 77(2)). In terms of procedures not entirely different from that as applied to shareholders, the directors may among themselves too resolve to remove a director from the board of a company (sections 77(3) & (4)).

It is important for directors to realise that they serve at the pleasure of shareholders. It is likewise necessary for shareholders to know that they have remedies against directors who do not deliver on their mandate, and that keeping directors in check amounts to good corporate governance.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

MISUSE OF ASSESSED LOSSES

A2_bAn assessed loss for income tax purposes is a potentially valuable asset: it represents past losses made by a taxpayer which is able of being carried forward to subsequent tax years against which future taxable profits are able of being set off. The set-off of historic losses – in the form of an assessed loss – against existing taxable income has the obvious benefit of resulting in a reduced income tax charge against current and/or future taxable income generated from trade.

It is therefore quite common that such an assessed loss is assigned a determinable value (as a so-called ‘deferred tax asset’) as a secondary benefit when a company with an assessed loss is sold. However, it may happen that a potential purchaser of the shares in a company does so with the sole or main purpose to acquire the underlying assessed loss, and not necessarily the other assets that the company may own. For example, if a natural person were to incorporate his or her profitable business, it would be preferable to make use of a dormant company with a historic assessed loss, rather than incorporating a new company or make use of a shelf company. The established assessed loss can then be used to negate the income tax consequences that would otherwise have arisen from the business.

Section 103(2) of the Income Tax Act, 58 of 1962 (‘Income Tax Act’) has been designed to counter exactly this form of abuse if the utilization of an assessed loss is the sole or main purpose of a specific transaction. The provision applies whenever the South African Revenue Service (‘SARS’) is satisfied that any agreement affecting, or any change in the shareholding in, any company has been effected solely or mainly for purposes of utilizing an assessed loss of a company in order to avoid an income tax liability. Should these prerequisites be met, SARS has the power to disallow the setoff of any such assessed loss against any such income generated by the company.

Section 103(2) moreover does not only apply to taxable trading profits, but also where an assessed loss is used to negate capital gains tax exposure, or even where capital losses (as opposed to assessed income tax losses) are at stake. The provision also applies to trusts with assessed losses as much as it does to companies.

Finally, it is worth noting that section 103(2) may be used in the alternative to the general anti-avoidance rules (the so-called GAAR) contained in sections 80A to 80L of the Income Tax Act, and vice versa. It is arguable rather that the provisions of section 103(2) would be more difficult for the taxpayer to escape from, as (unlike the GAAR) it is not a prerequisite of this anti-avoidance measure that an element of ‘abnormality’ linked to the transaction in question also need to be illustrated for section 103(2) to apply.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)