A new Companies Act – its all in the direction

This is part 3 of a series of posts about the new Companies Act. You can read the first two parts and other posts about South African corporate law right here.

This post was written by Shirley Fodor during her time as a partner at Jacobson Attorneys

It is a long established principal that the business and affairs of a company must be managed by, or in terms of, the instructions given by the board of directors. The question is – who is a director and what is a director entitled to do?

Confusion is frequently caused by business nomenclature. Is everyone with the title “director” or “manager” necessarily a director in terms of any of the New Act? The simple answer is, no. A director, in terms of section 66 of the New Act is someone who has given their written consent to act in that capacity once appointed in accordance with the provisions of section 66 and is, subject to what is set out below in respect of ex officio and alternate directors, generally appointed by the shareholders of the company.

A private company (or personal liability company) is required to have at least one director, and a public company is required to have at least 3 directors. The company’s Memorandum of Incorporation may specify:

  • a higher minimum number of directors to be appointed;
  • the direct appointment and removal of one or more directors by any person who is specifically named in the Memorandum of Incorporation for that purpose;
  • a person to be an ex officio director as a consequence of that person holding some other title, designation or similar status, and will be considered as having all the powers and functions of any other director of the company, except to the extent that such powers are specifically restricted by the Memorandum of Incorporation;
  • the appointment of alternate directors; and
  • in respect of public and/or state-owned companies must provide for the election of half of the board of directors by the shareholders.

This means there are now essentially five species of director:

  • an executive director: who is directly involved into the day-to-day management of the company, and is an employee of the company or one of its subsidiaries (such directors will frequently be Memorandum of Incorporation appointments made by the shareholders);
  • a non-executive director: who is not involved in the day-to-day management of the company and is not a full time salaried employee of the company or any of its subsidiaries;
  • an independent director: who is a non-executive director, does not represent the interests of any shareholder, is not employed in the company or its subsidiaries in any way and has no contractual interests in the company or group;
  • an ex officio director: who holds office as a result of another office, title or status. Ex officio directors have those powers and obligations assigned to them in the Memorandum of Incorporation and are not appointed by the shareholders.
  • an alternate director: who is appointed by an appointed director (whether executive or non-executive) to serve in their stead, as and when required. The Memorandum of Incorporation may set out the manner of election of independent directors.

In order to qualify for an appointment as a director, the following qualifications must be met in order to be eligible for the appointment:

  • the party to be appointed may only be a natural person (in the Netherlands Antilles, for example, juristic persons may be appointed as managing directors of a company as there is a split board concept); or
  • an unemancipated minor, or a person suffering under a similar legal disability; or
  • any person who does not meet any specific criteria laid down in the Memorandum of Incorporation.

In addition, certain persons are disqualified from being appointed as a director. Save in respect of a disqualification imposed by a court of law, the remaining categories of disqualification are not absolute. These disqualifications are set out in section 69(8)(a) of the New Act and include:

  • a person who has been prohibited by a court of law from becoming a director;
  • a delinquent;
  • an unrehabilitated insolvent;
  • a person removed from a position of trust as a result of dishonestly;
  • a person who has been convicted, without option of a fine for offences involving dishonesty.

Notwithstanding what is set out above the New Act contains certain exemptions in respect of persons who would otherwise be disqualified to act as a director. These exemptions are set out in section 69(11) of the New Act and permit:

  • an unrehabilitated insolvent;
  • a person who was removed from office for dishonest conduct;
  • a person who was committed of a crime that involved dishonesty; or
  • a person declared to be a delinquent.

to apply to court, it would seem on an ex parte basis, for permission to act as a director despite the disqualification. In so doing, the applicant will have to prove on a balance of probabilities that they have been rehabilitated and can be put in a position of trust once more.

As set out above a company’s Memorandum of Incorporation, may in certain respects alter the baseline position set out in the New Act. The most important of these are the following:

  • a greater number of directors than that set out in the New Act (note that in respect of a public company, the number of directors may not be less than three);
  • half the number of directors must appointed by shareholders in a profit company and the Memorandum of incorporation may specify a particular person who will be capable of appointing and removing directors, provided the minimum number of directors is at all times appointed;
  • the designation and appointment of ex officio directors;
  • While payments may be made to directors for their services as such, there is no right to such payment contained in the New Act. Any payment made to directors may only be made, if the specific payment is not prohibited by the Memorandum of Incorporation and was approved by special resolution taken within the previous two years.

Directors may be removed (notwithstanding anything to the contrary contained in any agreement) by the shareholders, by ordinary resolution, or in some instances by the board of directors.

In the event that the shareholders wish to remove a director, that director must be given notice (not less than the period a shareholder is entitled to for notice of a meeting) of the intended removal and given an opportunity to make representations to the shareholders either in writing prior to the meeting, or orally at the meeting.

The board of directors, where the board consists of more than 3 members may remove one of its members in the event that:

  • a director has become ineligible or is disqualified;
  • a director is incapacitated and unable to perform his duties, and is likely to remain incapacitated for some time. (The amount of time that will be considered as reasonable will depend on the individual circumstances of the director and the severity of his ailment);
  • a director leaves the Republic and there are no other directors resident in the Republic;
  • a director has not properly performed his duties as a director.

Where the board of directors has initiated and sanctioned a removal, the director in question may apply to court to have such decision reviewed.

Unless the company’s Memorandum of incorporation provides otherwise, the board of directors may (and in the case of a public, listed company, must) appoint board committees.

The King Code on Corporate Governance (“the King Code”) requires the formation of a remuneration committee and an audit committee and it is recommended that a nominations committee be formed, with such additional committees as may be desirable in terms of the nature and industry in which the company operates.

Private companies are not obliged to establish committees of the board, but it is recommended in order to provide greater accountability and transparency within the company.

In the next installment of this series, we will be examining the duties of directors and the newly introduced standards of conduct to which directors are required to adhere and which make substantial inroads to the traditional concept of the corporate veil.

Published by Paul Jacobson

Enthusiast, writer, Happiness Engineer at @automattic. I take photos too. Passionate about my wife, Gina and #proudDad.

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