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© Webber Wentzel 2011
THE NEW COMPANIES ACT, 2008
DUTIES, RESPONSIBILITIES AND LIABILITY OF DIRECTORS AND PRESCRIBED OFFICERS
SASLAW - 6 SEPTEMBER 2011
MADELEIN BURGER
Transitional provisions – Schedule 5
• Office as director, prescribed officer, company secretary or auditor immediately before the effective date – o continue to hold office (subject to the 2008 Act and
the MOI);o director, company secretary, prescribed officer or
auditor ineligible or disqualified under 2008 Act – deemed to have resigned.
Transitional provisions – Schedule 5 (cont)
• A person is a prescribed officer if the person –
o exercises general executive control over and management of the whole, or a significant portion, of the business and activities of the company; or
o regularly participates to a material degree in the exercise of general executive control over and management of the whole, or a significant portion, of the business and activities of the company,
irrespective of any particular title given by the company to an office held by the person in the company; or a function performed by the person for the company.
Transitional provisions – Schedule 5 (cont)
• Despite anything to the contrary in a company’s MOI, the following provisions apply from the effective date as regards pre-existing companies -
o the duties, conduct and liability of directors;o rights in terms of this 2008 Act of shareholders to receive any
notice or have access to any information;o meetings of shareholders and directors, and adoption of
resolutions; ando generally, fundamental transactions.
NB The two year grace period applying to MOIs and rules does NOT override the above.
Transitional provisions – Schedule 5 (cont)
• A right of any person to seek a remedy in terms of the 2008 Act applies with respect to conduct pertaining to a pre-existing company and occurring before the effective date, unless the person had commenced proceedings in a court in respect of the same conduct before the effective date.
Transitional provisions – Schedule 5 (cont)
• Position re distributions, financial assistance, insider share issues, options approved before effective date and not implemented – approvals subject to the 2008 Act, if approved but not implemented before the effective date.
Issuing of shares (section 41)
• Shareholder approval for issuing of shares
o A special resolution passed by shareholders is required -
… for an issue to present or "future" directors or officers; for an issue to a person related or inter-related to the
company, or to a director or prescribed officer of the company or a nominee,
subject to certain exceptions.
Issuing of shares (cont)
• Liability of directors if unauthorised shares are issued or the relevant special resolution not passed
o The directors will be liable for any loss, damage, costs (direct or indirect), sustained by the company as regards the issue of unauthorised shares or the issue of shares where a special resolution was required, but not in fact obtained if they –
were present at the relevant meeting; or participated (i.e. signed a round robin resolution); and knew the shares were not authorised or the necessary special
resolution was not passed; and failed to vote against the issue of the shares.
Issuing of shares (cont)
o Note the definition of "knew" or "know" – when used with respect to a person; and in relation to a particular matter; means that the person either –
o had actual knowledge of that matter;o was in a position in which the person reasonably ought to
have – • had actual knowledge;• investigated the matter to an extent that would have
provided the person with actual knowledge; or• taken other measures which, if taken would reasonably
be expected to have provided the person with actual knowledge of the matter.
Loans or other financial assistance to directors (section 45)
• Financial assistance to directors, prescribed officers and persons related to them (of company and related and inter-related persons).
• Special resolution passed in the previous two years.• Solvency and liquidity.• Fairness and reasonableness.• The board decision has to be circulated in writing to all
shareholders and trade unions, within -
o 10 business days after resolution adopted if all loans in the financial year exceeds 0,1% of the net worth of the company;
o 30 business days after the end of the financial year in all other instances.
Loans or other financial assistance to directors (cont)
• Voidness and liability of directors
Repurchase of shares (section 48)
• A decision by the board of a company to repurchase shares from a director or prescribed officer of the company, or a person related to a director or prescribed officer of the company.
• Special resolution.
• Solvency and liquidity.
• 120 day rule.
Duties: the common law, the 2008 Act and King III
• The common law – o fiduciary duties and the duty of care and skill;o binding to the extent not inconsistent with the 2008 Act.
• The 2008 Act – o duties, responsibilities and obligations of directors – legally
binding.
• King III – o “apply or explain”;o “sets out structures, procedures and processes to enable
directors to discharge their legal duties and oversee legal compliance”.
Board duty, composition and appointment
• The 2008 Act – “The business and affairs of a company must 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 this Act or the company’s Memorandum of Incorporation provides otherwise” (section 66(1)).
Board duty, composition and appointment (cont)
• Board composition (sections 66(2) and (3)) -
o private company or personal liability company: at least 1 director, in addition to …;
o public company or non-profit company: at least 3 directors, in addition to …;
o MOI may specify higher number;o MOI of profit company must require election of at least
50% of directors (including alternates) by shareholders.
Board duty, composition and appointment
• MOI may provide for -
o the direct appointment and removal of one or more directors by any person who is named in, or determined in terms of, the MOI;
o a person to be an ex offıcio director of the company; oro the appointment or election of one or more persons as alternate
directors of the company.
• Person only becomes director after (section 66(7)) -
o appointment / election ito the 2008 Act; ando person delivers written consent to serve as director to company.
Ineligibility and Disqualification
• Provisions apply to –
– directors;– prescribed officers; and– members of board committees.
Ineligibility and Disqualification (cont)
• The election or appointment of a person as a director is a nullity if, at the time of the election or appointment, that person is ineligible or disqualified.
• A person who becomes ineligible or disqualified while serving as a director of a company ceases to be entitled to continue to act as a director immediately.
Ineligibility
• Section 69(7) - a person is ineligible to be a director of a company if the person -
o is a juristic person;o is an unemancipated minor, or is under a similar legal
disability; oro does not satisfy any qualification set out in the company’s
MOI.
Disqualification
• Prohibited by court or declared to be "delinquent”.• Unrehabilitated insolvent.• Prohibited in terms of public regulation.• Removed from office of trust – misconduct or
dishonesty.
Disqualification (cont)
• Convicted and imprisoned without an option for fine or fined more than the prescribed amount (R1 000 – Regulations) for -
o theft, fraud, forgery, perjury; oro an offence -
involving fraud, misrepresentation or dishonesty; in connection with promotion, formation or management of a
company; OR under 2008 Act, Insolvency Act, CC Act, Competition Act, FICA,
Securities Services Act, Ch. 2 of the Prevention and Combating of Corruption Activities Act.
• Commission must keep a register of persons who are disqualified.
Disqualification (cont)
• If offence is removal from office of trust or conviction without option of fine or fined more than R1 000 (ito the Regulations), disqualification lasts until -
o the later of 5 years from removal from office or completion of sentence; or
o the end of one or more extensions, as determined by Court, on application by Commission -
at any time before expiry of term; court extension – limited to 5 years at a time.
• Court may exempt completely.
Remuneration
• The 2008 Act (section 66(8)) –
o requires a special resolution to approve remuneration of all directors for services as a director.
• Disclosure in financial statements -
o new requirements;o broader application;o individual disclosure required.
Duties
• Fiduciary duties in terms of common law include -
o act in good faith in the interest of the company;o avoid conflicts of interests with the company;o act for a proper purpose;o do not exceed the company’s powers;o exercise discretion independently;o not to disclose/misuse confidential information;o account for secret profits;o disclose interests in contracts with the company;o do not misappropriate corporate opportunities.
• Detailed interpretation in past court decisions.
Duties (cont)
• Fiduciary duties in 2008 Act -
o duty to act in best interest of the company;o duty to act in good faith and for a proper purpose;o duty regarding information.
Duties (cont)• Common law duty of care and skill -
o director must exercise his duties with the degree of skill that may reasonably be expected from a person with his particular knowledge and experience;
o the skill that he possesses must be exercised with reasonable care.
• Duty of care and skill in 2008 Act -o higher standard;o a director must act with the care, skill and diligence that may
reasonably be expected of someone - fulfilling his functions; and having his knowledge, skill and experience.
o directors must have certain minimum skills, depending on functions.
Business judgment rule
• Business judgment rule under the 2008 Act
o a director satisfies his duties (regarding information, acting in company’s best interests, and care and skill but not good faith and proper purpose) in respect of a particular matter if -
he has taken reasonably diligent steps to become informed about the matter;
he has no material personal financial interest in the matter and had no reasonable basis to know that any related person has a personal financial interest in the matter, or he complied with s 75 (disclosure) with respect to any interest in the matter; and
Business judgment rule (cont)
he made a decision, or supported a decision of the board/board committee regarding the matter, and had a rational basis for believing, and did believe, that the decision was in the company’s best interests;
o director is entitled to rely on certain persons in exercising his power and performing his functions, e.g. employees he reasonably believes to be reliable, professional advisers and board committees he does not serve on.
Duty to notify if a company is in financial distress
‘‘Financially distressed’’, in reference to a particular company at any particular time, means that—
o it appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months; or
o it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.
• Use of the word “insolvent” problematic as it includes technical and commercial insolvency.
Duty to notify if a company is in financial distress (cont)
• Section 129(7) –
o if the board of a company;o has reasonable grounds to believe that the company is
financially distressed;o but the board has not adopted a resolution contemplated
in section 129;
Duty to notify if a company is in financial distress (cont)
o the board must deliver a written notice to each affected person (creditors, shareholders, trade unions representing employees and other employees), setting out the criteria referred to in section 128(1)(f) (the section dealing with the meaning of financially distressed) that are applicable to the company;
o and its reasons for not adopting a resolution contemplated in this section.
• Effect?
Liability of directors
• Section 77.
• Liable for loss, damages and costs suffered by the company (and any other party if breach of the 2008 Act) pursuant to breaches of duties, provisions of the company’s MoI and other provisions in the 2008 Act, e.g. not having complied with the requirements for the following –
o issuing of shares;o distributions;o financial assistance;o loans to directors or related entities;o repurchase of shares.
Liability of directors (cont)
• Liable for loss, damages or costs suffered by the company (and any other party if breach of the 2008 Act) pursuant to -
o taking part in reckless trading by company;o unauthorised acts on behalf of company;o being party to acts/omission of company to defraud creditors,
employees or shareholders, or other fraudulent acts of company;
o signing/approving false or misleading financial statements or prospectuses;
o failing to vote against certain acts prohibited.
Liability of directors (cont)
• New liability in 2008 Act - o section 218: “Any person who contravenes any provision of this
Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention”;
o not only company can claim from directors for breaching duties or other provisions of the 2008 Act (previously only under section 424 of the Companies Act, 1973 / derivative actions);
o e.g. shareholders, employees and creditors of company can institute a claim against directors if they suffer loss or damage and they are able to show the causal link.
• New extended standing to apply for remedies - o right to apply to court extended to e.g. a person acting as a
member of a group of affected persons (including trade union).
Declaration of interests
• Old position –
o disclosure required if a direct or indirect material interest in a contract or proposed contract and only if the contract is “of significance in relation to a company’s business”;
o general notice for financial year, declaring membership of a company and interested in contract.
• The 2008 Act - section 75 -
o all material personal financial interests may be disclosed.
• Provisions also applicable to alternate director, prescribed officer, member of board committee, irrespective whether a member of the board.
Declaration of interests (cont)• Disclosure in advance -
o advance disclosure – at any time by written notice to board or shareholders setting out nature and extent of personal financial interest.
• Procedure - o if director or related person has personal financial interest in matter
before the board, director must -• disclose interest and general nature before matter considered;• disclose to meeting any material information known (as defined) to the
director;• leave meeting after making disclosure;• not take part in deliberation;• while absent -
regarded as present for quorum; not present for determination purposes.
Declaration of interests (cont)
• Disclosure after –
o director acquires personal financial interest in an agreement or other matter in which company has a material interest, (or director knows that related party acquires such interest) after approval by company, full disclosure required of -
nature and extent of interest; material circumstances relating to director’s (or related person's)
acquisition of interest.
• NB: "knowing" is defined widely e.g. to include reasonably ought to have investigated.
Declaration of interest (cont)
• Consequences if does not follow the 2008 Act –
o old position - offence;o position under the 2008 Act (section 75) -
a decision by the board, or a transaction or agreement approved by the board, or by a company, is valid despite any personal financial interest of a director or person related to the director, only if -
o it was approved following disclosure of that interest in the manner contemplated in section 75; or
o despite having been approved without disclosure of that interest, it—• has subsequently been ratified by an ordinary resolution of the
shareholders following disclosure of that interest; or• has been declared to be valid by a court.
A court, on application by any interested person, may declare valid a transaction or agreement that had been approved by the board, or shareholders, as the case may be, despite the failure of the director to satisfy the disclosure requirements of this section.’’.
Declaration of interest (cont)
• The liability of a person in terms of this section is joint and several with any other person who is or may be held liable for the same act.
Indemnification and insurance
• The 2008 Act – company may indemnify a director in respect of any liability unless the liability arises -
o from wilful misconduct or wilful breach of trust on the part of the director;
o in respect of a fine imposed on the director due to his conviction of an offence in terms of any national legislation;
o where the director knowingly (as defined) - acted without authority in relation to the company; acquiesced in the carrying on of the company’s business recklessly,
with gross negligence, with intent to defraud any person or for any fraudulent purpose; or
was party to an act or omission by the company calculated to defraud a creditor, employee or shareholder of the company, or had another fraudulent purpose.
Indemnification and insurance (cont)
• A company may purchase insurance to protect -
o a director against – any liability or expenses for which the company is permitted to
indemnify a director;
o the company against - any expenses that the company is permitted to advance to a
director, or for which the company is permitted to indemnify a director; or
any liability for which the company is permitted to indemnify a director.
• NB: MOI may provide otherwise.
Anti-avoidance (section 6)
• A court, on application by the Commission or the Takeover Panel, may declare any agreement, transaction, arrangement, resolution or provision of a company’s MOI or rules -
o to be primarily or substantially intended to defeat or reduce the effect of a prohibition or requirement established by or in terms of an unalterable provision of the 2008 Act; and
o void to the extent that it defeats or reduces the effect of a prohibition or requirement established by or in terms of an unalterable provision of the 2008 Act.
Compliance notices and administrative fines (sections 171 and 175)
• The Commission, or the Executive Director of the Takeover Panel, may issue a compliance notice in the prescribed form to any person whom the Commission or Executive Director, as the case may be, on reasonable grounds believes -
o has contravened the 2008 Act; oro assented to, was implicated in, or directly or indirectly benefitted
from, a contravention of the 2008 Act, unless the alleged contravention could otherwise be addressed in terms of the 2008 Act by an application to a court or to the Companies Tribunal.
Compliance notices and administrative fines
• Section 175 - a court, on application by the Companies Commission or the Takeover Panel, may impose an administrative fine -
o only for failure to comply with a compliance notice; ando not exceeding the greater of -
10% of the respondent’s turnover for the period during which the company failed to comply with the compliance notice; and
the maximum prescribed in terms of subsection 175(5)(R1 million).
