Transcript SASLAW - Directors (6 September)

THE NEW COMPANIES ACT, 2008
DUTIES, RESPONSIBILITIES AND LIABILITY
OF DIRECTORS AND PRESCRIBED OFFICERS
SASLAW - 6 SEPTEMBER 2011
MADELEIN BURGER
© Webber Wentzel 2011
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; and
o 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 interrelated 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; or
o 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; and
o 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; or
o 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; or
o 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
o
o
o
o
o
o
o
o
act in good faith in the interest of the company;
avoid conflicts of interests with the company;
act for a proper purpose;
do not exceed the company’s powers;
exercise discretion independently;
not to disclose/misuse confidential information;
account for secret profits;
disclose interests in contracts with the company;
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
o
o
o
o
issuing of shares;
distributions;
financial assistance;
loans to directors or related entities;
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; or
o 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; and
o 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).
Contact details
Madelein Burger
Partner
Webber Wentzel
Tel: (011) 530 5278
Email: [email protected]