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COMPANIES
PART 2
“the Act” refers to the Companies Act

“SH” = Shareholder

UNIT 3
CORPORATE GOVERNANCE - DIRECTORS

DEFINITIONS:
▪ “Director” = member of board of company, or alternate director, including any person occupying
position of a director or alternate director, by whatever name designated.
- Thus even if person is not appointment correctly as director, but is acting in the position,
he qualifies as a “real” director.
- Including de facto & de jure director (below); excluding pretended director.

▪ “Alternate director” = acts in the place of another elected/appointed director.

- E.g. takes place of director who is on sick leave (only allowed if MOI allows it).

▪ “De facto director” = person who acts as director of company even though he is not formally
appointed as director or whose appointment as director is defective.

▪ “De Jure director” = validly and formally appointed as director who has freely consented to that
appointment.

▪ “Ex officio director” = director of company as a consequence of holding some other office, title,
designation in the company.

▪ “Executive director” = director who is involved in day-to-day management of company and is

full-time salaried employee of the company - generally under a contract of service.

▪ “Non-executive director” = director who is not employed full-time by company - is not involved
in day-to-day management of company, but is appointed to board for purpose of bringing an
independent and external perspective to management.

▪ “Audit committee” = sub-committee of a company’s board, appointed by incorporators, board

of directors or shareholders, which plays an important role in (a) identifying financial risks; (b)
managing these risks; (c) ensuring the integrity of internal financial controls; and (d) ensuring the
integrity of integrated financial reporting.

▪ “Board committee” = board may appoint any number of committees & may delegate any of its
authority to these committees, but board remains liable for proper performance of the duty
delegated (only if MOI doesn’t provide otherwise).

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GENERAL
▪ Management powers & capacity lies with Board (s66).
▪ Every company must have Board, compromising of at least:
i. 3 directors (Public company & NPCs)
ii. 1 director (Private & Personal Liability company)
- MOI may provide for higher minimum nr of directors
- However, failure to meet minimum requirement does not eliminate authority of Board.
- Minimum nr is in addition to what is required to form Audit Committee (AC) or Social &
Ethics Committee (SEC).
- E.g. if company has AC, then minimum 6 directors on Board (3 + 3).
▪ Remuneration may be paid to directors for their service as directors.
- Special resolution required within previous 2 yrs.

Prescribed officers (Regulation 38)

= non-director person who:
a) exercises general executive control over management or a significant portion of the
business and activities; or
b) regularly participates to a material degree in the exercise of the whole, or a significant
portion, of the business and activities
▪ E.g. CEO or COO.
▪ Many rights & duties of directors also applies to prescribed directors.

Organs of company
▪ Generally, only:
i. Board and
ii. Shareholders
- However, some larger companies may need to appoint:
iii. Audit Committee (not a “board committee” though) and
iv. Social and Ethics Committee

APPOINTMENT & REMOVAL OF DIRECTORS

APPOINTMENT
1st. Incorporators of company become 1st directors, and
2nd. Subsequent directors:
a) Person named in MOI (e.g. ex officio or alternate director), or
b) SHs elect directors of profit company (not SOC):
- However, SHs do not elect:
1. Incorporators,
2. Directors appointed by MOI, and
3. Ex officio directors
- Profit company’s MOI must provide that SHs must elect >=50% of directors &
alternate directors (MOI can increase %).
c) Appointed by specific person named in MOI or Board
▪ Director must consent upon appointment & file notice with CIPC.

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REMOVAL
Who can remove directors? (section 71)
1st. Shareholders
- Remove by ordinary resolution (majority rule: 50%+1) - % cannot be changed.
- Can remove any director on any grounds, even if MOI/rules/agreements provide
otherwise.
- Director given notice about potential removal, resolution & meeting, and given opportunity
to make representation before voting.
- After removal, director may apply for damages or compensation for loss of office if he was
protected by any provisions/rules/agreements.
2nd. Board of directors
- Applicable if company has > 2 directors:
- Can only remove directors under certain grounds:
i. If director becomes ineligible or disqualified (see below)
ii. If director becomes incapacitated to extent not able to perform his functions, and
capacity unlikely to be regained within reasonable time
iii. If director has neglected (or been derelict in performance) his functions
- Directors make proposed board-resolution to remove director (majority voting required –
hence not available if < 2 directors).
- Director must be given notice of meeting, proposed resolution & reasons, and opportunity
to make presentation before voting.
3rd. Companies Tribunal
- Applicable if company has < 3 directors:
- Any director or SH applies to Companies Tribunal for a director to be removed.
- Notice & reasons given, and opportunity to make representation.

DISQUALIFICATION
Some people cannot (or may not) be a director:

INELIGIBLE
= absolute (no exceptions)
▪ Person is ineligible to be director of company (“cannot”) if:
a) Juristic person,
b) Legal disability (e.g. unemancipated minor, declared by court), or
c) Does not satisfy qualification set out in company’s MOI (e.g. “All directors must be CAs”).

DISQUALIFIED
= not absolute (court has some discretion) & MOI may prescribe additional grounds
▪ Person (who is eligible) is disqualified from being director (“may not”) if:
a) Unrehabilitated insolvent,
b) Legal prohibition (court), or
c) Court declared person to be delinquent (see below)
d) Removed from office of trust for misconduct (dishonesty)

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e) Convicted (in SA or elsewhere) & imprisoned without option of fine, or fined more than
prescribed amount, for offence involving fraud, misrepresentation or dishonesty
f) Director under probation (court) (see below)

Court orders:
- Court can declare person delinquent or under probation as grounds for disqualification
(see above).
- Following persons can apply for this court order (locus standi):
- company, shareholder, director, company secretary, prescribed officer, trade
union, Companies Commission, Takeover Regulation Panel.
i. Delinquent director (s162)
- may not serve as director for certain period.
- order may be unconditional & subsist for lifetime, or conditional & subsist for >= 7 years.
▪ Court must declare person to be delinquent director if person:
a. Consented to serve as director, or acted as director or prescribed officer, while ineligible or
disqualified
b. While under probation order, acted as director that contravened that order
c. While a director:
- Grossly abused position
- Intentionally (or by gross negligence) inflicted harm upon company or subsidiary
- Acted with gross negligence, wilful misconduct or breach of trust ito director’s
functions in company
d. >= 2 times personally convicted of an offence
ii. Director on probation (s165)
- may not serve as director except to extent permitted by the order.
- may be subject to any conditions & generally subsists for period < 5 years
▪ Court may make order placing a person under probation, if:
a. while serving as a director, the person
i. was present at meeting & failed to vote against a resolution despite inability of
company to satisfy solvency and liquidity test, or
ii. acted in manner materially inconsistent with duties of director, or
b. within any period of 10 years:
i. person has been director of > 1 company, and
ii. during time person was director of each such company >=2 of those companies each
failed to fully pay all its creditors or meet all its obligations.

SOCIAL AND ETHICS COMMITTEE

- Regulation 43 (read with s72 Act)
▪ At least 3 members
▪ At least 1 non-executive member
▪ Compulsory for:
i. Listed Public company
ii. State-owned company
iii. Company with public interest score > 500

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Exceptions:
i. Subsidiary company where Parent company’s Social & Ethics committee fulfils
Subsidiary’s functions.
ii. Companies Tribunal exempted company from having committee.

FUNCTIONS
To monitor company’s activities with regard to matters relating to:
i. Social and economic development
- 10 principles of United Nations Global Compact Principles
- OECD recommendations regarding corruption
- Employment Equity Act
- Broad-Based Black Economic Empowerment Act
ii. Good corporate citizenship
- promotion of equality, prevention of unfair discrimination, and reduction of
corruption
- development of communities
- donations and charitable giving
iii. Environment, health and public safety
iv. Consumer relationships
v. Labour and employment

DUTIES OF DIRECTORS
GENERAL
▪ Directors owe duties to company.
- These duties are mandatory, prescriptive and unalterable, and apply to all companies.
- Directors cannot contract out of these duties.
- Applies to prescribed officers & board committee members as well.
- Object of these duties is to raise the standard of corporate and directorial behaviour.
▪ These duties are based on:
1. Common law and
2. Statutory duties - Companies Act (section 76)
- 2 main categories: Fiduciary duties and Duty of care & skill
- However, duties in Act do not exclude common law.
- Statutory duties are a partial codification of common law duties (i.e. it overlaps).
- Can also use pre-2008 case law.

COMMON LAW DUTIES

a) Fiduciary duties
- If breached, liable (sui generis) for loss suffered by company and/or benefit received by
director.
- Divided into 2 main duties:
i. Duty to act bona fide (good faith)
▪ Subjective standard: director must act honestly.
▪ Objective standards:

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- Act in best interests of company

- Do not exceed powers
- Use powers for proper purpose
- Exercise independent & unfettered discretion/judgement
ii. Duty to avoid conflict of interest
a. Must not make any “secret” profits:
- Director may not retain any personal profit/gain/advantage received while performing duty
as director, even if not at expense of company.
- Liable if not full disclosure & approval by company (even if company knew about it).
b. Should not usurp corporate opportunities:
- Director may not take business opportunity for himself which actually should go to company.
- E.g. Entity is accounting firm. Director does client’s taxes in his personal capacity.
▪ Contracts between company & its directors are voidable at instance of company if not approved
after full disclosure due to conflict of interests.

b) Duty of care and skill

▪ Director acting with care & skill as expected of his functions or powers.
- If breached, liable based on delict
- Requirements of delict:
i. Act/omission
ii. Wrongful
iii. Fault
iv. Damage/loss
v. Causation
▪ ‘Business judgement test’ available to director: then not liable (see later).

COMPANIES ACT (“Standards of conduct” – statutory duties)

▪ Section 76: applies to directors, alternate directors, prescribed officers, members of Audit
Committee or board committees.
- Common law duties (above) still apply, provided they are not amended in this section or in
conflict.
Positive duties (do)
a) Good faith and For proper purpose (Fiduciary duty)
- Good faith = what director honestly considers to be best interests of company (subjective).
- Test for proper purpose (objective):
1. Identify particular power that is being challenged
2. Identify proper purpose for which the power was given
3. Identify substantive purpose for which the power was exercised
4. Decide whether this purpose was proper
- If improper purpose, decision/action is voidable by court.
b) Best interests of company (Fiduciary duty)
- Not cause intentional/negligent harm to company.
1. Pluralist approach – favours interests of other stakeholders (other than just SHs).
2. Enlightened shareholder value approach - interest of other stakeholders only taken into
account if it promotes interests of shareholders (popular approach).

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c) Degree of care, skill & diligence that may reasonably be expected of person:
i) carrying out same functions in relation to the company as those carried out by that
director; and
ii) having the general knowledge, skill and experience of that director.
- E.g. King IV Report is not law, but it can cause liability if not adhered to based on duty of care.
d) Duty to disclose information (see later)

Negative duties (refrain)

a) Not use position or information obtained for unintended purposes:
i. to gain advantage for himself, or for another person other than company
ii. knowingly cause harm to company/subsidiary
b) Communicate to board at earliest opportunity any information that comes to director's
attention, unless the director:
- believes info to be immaterial or generally available to public
- is bound not to disclose that information
c) Reckless trading (s22)
- Company must not carry on business recklessly, with gross negligence, with intent to
defraud or for any prohibited conduct.
- Can cause personal liability, delinquent director and criminal offence.

DUTY TO DISCLOSE
Section 76:
▪ Director must communicate to board at earliest opportunity any information that comes to
director's attention, unless the director:
- believes info to be immaterial or generally available to public, or
- is bound not to disclose that information (legal/ethical obligation)

Section 75:
Conflict of personal financial interests
i. Future contracts/matters
▪ If director has (or knows that related person has) personal financial interest in respect of a
matter to be considered at a board meeting, director:
a) must disclose interest & its nature
b) must disclose any material information
c) may disclose any observations
d) must leave the meeting immediately after making any disclosure
e) must not take part in consideration of matter
- If above steps are followed and Board still decides to enter into contract, contract is valid.
- I.e. Conflict of interest by director does not automatically mean contract is void.

ii. Existing contracts/matters

▪ If director has (or knows that related person has) personal financial interest in respect of a
matter already approved by company:
a) director must promptly disclose to board or shareholders:
- nature and extent of that interest, and
- material circumstances relating to director’s acquisition of that interest

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b) Contract/decision is then only valid if:

- it was approved following disclosure a) above, or
- despite having been approved without disclosure of that interest, it has
subsequently been ratified by ordinary resolution by SHs following disclosure of
that interest; or has been declared to be valid by a court

DUTY OF CARE, SKILL AND DILIGENCE

- This duty is prescribed under Common Law & Companies Act (see above), however there are
some differences:
Common law
▪ Standard for care/skill = that which is expected of that director in his position.
- Very low standard (not “strict”).
- Based on negligence or carelessness.

Companies Act (s76)

▪ Test for reasonable care/skill = reasonable person carrying out same functions as director
(objective test) with same knowledge/skill as that director (subjective test).
- Higher standard than common law.
- However, not all possible care expected – only reasonable.
- Court case used: Outa v Myeni 2020

Business judgement rule/test

▪ This rule protects directors from liability when mere errors of judgment or poor business
decisions were made, provided they met requirements below.
- Compliance with this rule means director is not liable.
- Only tested once director “breaches” duty.
Requirements:
i. Director took diligent steps to become informed about the matter, and
ii. Director:
- had no material personal financial interest in the subject matter, or
- complied with requirements of disclosing interests, and
iii. Director had rational basis for believing decision was in best interests of company

DIRECTOR’S LIABILITY
▪ Breach of duty = director personally liable.
- NB director cannot be relieved from his duties.
- ‘Director’ includes alternate director, prescribed officer, board committee member
(irrespective whether person is also member of company’s board).
Common law duties
i. Fiduciary duties – liable based on sui generis for benefits/losses
ii. Duty of care & skill – liable based on delict

Companies Act duties (Section 77)

- Liable for any loss, damages or costs to company.

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Section 77
▪ S77 contains specific actions that leads to liability:
a. Act on behalf of company despite knowing that he has no authority
b. Signed, consented, or authorised publication of financial statements that were false or
misleading
c. Carrying on business recklessly despite knowing of the S22 prohibition
d. Failed to vote against a decision to:
- issue unauthorised shares, despite knowing that it had not been authorised in
accordance with S36
- provide financial assistance to person contemplated in S44 for acquisition of
securities of company, despite knowing that it was inconsistent with S44 or MOI
- provide financial assistance to director contemplated in S45, despite knowing that it
was inconsistent with S45 or MOI
- distribute (dividends) that would cause company to be insolvent (S46)

Other liability
i. Section 15
- MOI binds directors to the company and shareholders.
- According to section 77 this liability is delictual.
ii. Section 20(6)
- Shareholder has claim for damages against any person who fraudulently or due to gross
negligence caused company to do anything inconsistent with the Act or a limitation in
the MOI (unless shareholders ratified).
iii. 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.

INDEMNITY & INSURANCE (s78)

▪ Company can take out liability insurance to protect director against claims for negligent conduct
- Not allowed if director:
a. Acted in name of company despite knowing he lacked authority
b. Traded recklessly
c. Involved in act/omission despite knowing it will defraud creditor, employee or SH
d. Committed wilful misconduct (intentional) – main test
▪ Condonation: court can also provide relief to director who is liable but acted honestly &
reasonably (not wilful).

Sources:
- New Entrepreneurial Law, 2nd edition, LexisNexis
- Companies Act 71 of 2008

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PRACTICE QUESTIONS
Question 1
Assume a scenario of a director's duty to act with the necessary care, skill and diligence. You can rely on the
following facts: Kwinana is a chartered accountant and was a board member of South African Airways. You
have to explain the test for determining whether a director acted with the necessary care, skill and diligence in
detail and provide an opinion as to whether it is possible to disregard the fact that Kwinana is a chartered
accountant.

Section 76: Test for degree of care, skill & diligence = that which is reasonably expected of person:
i) carrying out same functions in relation to the company as those carried out by that director
(objective test); and
ii) having the general knowledge, skill and experience of that director (subjective test)

According to the subjective test, It is not possible to disregard the fact that she is a chartered accountant,
since it is her position, knowledge & skill to which she will be expected to act.

Question 2
H (Pty) Ltd is a company that sells health products. The directors of H (Pty) Ltd are disgruntled with one of their
fellow directors, Mr G. The other directors are of the view that Mr G’s “public image as a chain smoker is
damaging to the image of the company”. The directors thus wish to remove Mr G from office as a director.
May the board of directors of H (Pty) Ltd remove Mr G as a director? Give reasons for your answer.

Issue: May the Board remove a director?

Law: Board may only remove a director according to S71 under certain grounds, following a specific
procedure, with a majority vote (see notes above).
Application & conclusion: Damaging the image of the company is not a ground of removal in S71. Thus,
Board may not remove Mr G. Rather, the shareholders may remove the director with an ordinary resolution.
*Note… you can also argue that it meets a ground in S71, and then conclude that they can remove him.

Question 3
H (Pty) Ltd is a company that sells health products. Assume that the shareholders of H (Pty) Ltd intend to
remove Mr G from office as a director, on the grounds that his “public image as a chain smoker is damaging to
the image of the company”. Assume further that clause 14 of the Memorandum of Incorporation of H (Pty) Ltd
states as follows:

“14. Directors of the company must be removed from office by special resolution.”

Advise Mr G, in detail and with reference to relevant legal principles, whether or not the shareholders of H
(Pty) Ltd may remove him from office as a director and, if so, how the shareholders may remove him from his
position as a director of the company. You also have to discuss the validity of clause 14 of the Memorandum of
Incorporation of H (Pty) Ltd.

Issue: Removal of directors by shareholders and validity of MOI provision.

Law: Shareholders may remove directors on any grounds with an ordinary resolution (majority vote: 50%+1).
This is an unalterable provision and any provision to the contrary is void (S65 & S71)
Application & conclusion: The provision is void since the shareholders may only remove Mr G through an
ordinary resolution (not special). Mr G must be given notice about the potential removal, resolution &
meeting, and given opportunity to make representation before voting.

Question 4
Jamie is one of three directors of Privacy Priority (Pty) Ltd, a private company that specialises in software to
protect people’s personal information. Jamie has an LLB degree and three years’ experience as a director. The
company has a number of specific hypothetical scenarios that they want you to consider. In each of the
following scenarios, you have to:

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a) indicate whether a director in Jamie’s position can incur personal liability for breach of a director’s duty;
b) specify the applicable duty and the grounds on which liability will be incurred, if at all; and
c) specify whether this is an instance where the company may lawfully indemnify Jamie, should liability arise.

You need not indicate what the director will be held liable for e.g. losses, damages, etc.

Scenario 1: A new business opportunity presents itself to the company. The director has the general
authorisation to accept business opportunities. He accepts this specific opportunity, notwithstanding the fact
that he knows that the opportunity will cause financial losses to the company.

The duty: fiduciary duty to act in the best interests of the company.
She will be held liable if she caused intentional/negligent harm to the company. Thus, she can be held liable
since she knew it would cause financial losses to company.
The company may not indemnify Jamie since she committed wilful misconduct (S78).

Scenario 2: Another new business opportunity, pertaining to the purchase of computer hardware, presented
itself to the company. The prospective seller does not have connections with the company or any directors of
the company. The director has the general authorisation to accept business opportunities and accepted this
specific opportunity after consulting with hardware experts. The director has basic training, but no specialist
knowledge of hardware. Nevertheless, he believed that the opportunity was in the best interest of the
company, because the product was well priced and came highly recommended. Unfortunately, it turns out
that the hardware is unable to withstand heat and melts shortly after the computer is switched off.

The duty: act with necessary skill, care and diligence (s76).
The subjective test for care and skill is a reasonable person with same knowledge, skill and experience. The
director only has basic training and no specialist knowledge. Thus, it cannot be expected of him to have known
that the hardware is defective.
Also, the director passed the business judgement test (no connections, consulted with experts, highly
recommended, believed it’s in best interest).
Hence the director cannot be held liable since he is deemed to have acted with necessary skill & care.
If liability should arise however, company may indemnify him since he does not meet exceptions in s78.

Question 5

D (Pty) Ltd is a property development company. The managing director of D (Pty) Ltd, Mr S, purchases a plot of
land in the name of the company with the intention of developing a lifestyle estate. After the property is
registered in the company’s name, it is discovered that the land is not suitable for development purposes. The
shareholders allege that Mr S is liable for breach of his duty to exercise reasonable care and skill in concluding
the transaction. Advise Mr S, in detail, whether he has any defence that he could rely on. If so, what must Mr S
prove to be relieved of liability under the Companies Act 71 of 2008?

The defense Mr S can rely on is the business judgement rule. Mr S must prove the following:
iv. He took diligent steps to become informed about the matter, and
v. He:
- had no material personal financial interest in the subject matter, or
- complied with requirements of disclosing interests, and
vi. He had rational basis for believing decision was in best interests of company

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