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Caveat Legal’s Do’s & Don’ts of Director’s

Original article by our partner, Caveat legal, here: http://www.caveatlegal.com/directors-dos-and-dontsdirectors-dos-and-donts/

The South African Companies Act (“Companies Act” or “Act”) deals with standard of conduct required from directors in South Africa.

Section 75 of the Companies Act deals with the personal financial interest of directors, and Section 76 deals with required standards of directors’ conduct.

Section 75, sets out a process for a director to disclose any personal financial interest which he or she may have in a matter, issue or contract affecting the company, by delivering to the board or shareholders a notice setting out the nature and extent of that interest. Section 75 provides further that if a director has a personal interest in respect of a matter to be considered at a meeting of the board, or a related person (which includes a second company of which the director or a related person is also a director), then the director must disclose the interest and its general nature before the matter is considered, and must disclose to the meeting any material information relating to the matter and known to the director.  If the director is present at the meeting he or she must leave the meeting immediately after making such disclosures and must not take part in the consideration of the matter.  If a director acquires a personal interest in an agreement or other matter in which the company has a material interest, or knows that a related person has acquired a personal financial interest in the matter, the director must promptly disclose to the board and/or to the shareholders the nature and extent of that interest and the material circumstances.

Section 76 of the Act prohibits a director from using his/her position to gain any advantage or knowingly cause harm to the company. A director must communicate to the board at the earliest practicable opportunity any such information that comes to his/her attention.

Section 76(3) of the Act requires the director to exercise his/her powers and perform the functions in good faith and for a proper purpose, in the best interest of the company and with the degree of care, skill and diligence that may be reasonably expected of a person carrying out the same functions (i.e. this is an objective test) in relation to the company and having the general knowledge, skill and experience of that director (i.e. this is a subjective test). Section 76 also provides that a director must not use his or her position or any information obtained while acting in the capacity of director to gain an advantage for the director or for another person, and is obliged to use this for the benefit of the company or its wholly owned subsidiaries.  The director is not entitled to make use of any corporate opportunities and must account to the company for any secret profits, and may not compete with the business of the company for his/her personal benefit.

A director must not act in the name of the company in circumstances where the director knows that he/she lacked the authority to do so or acquiesce in the carrying on of the company’s business despite knowing that it was being conducted in a prohibited manner, or be a party to any act or omission by the company despite knowing that the act or omission was calculated to defraud a creditor, employee or shareholder, or that it had another fraudulent purpose. The director will be liable if he/she signs, consents to or authorises the publication of any financial statements that were false or misleading in a material respect.  A director must not take part in a meeting and fail to vote against a resolution in respect of the issuing of any shares or options despite knowing that those shares had not been legally authorised, or the issuing of any authorised shares without shareholder approval, as well as authorising the company to provide financial assistance knowing that this would be in contravention of Sections 44 or 45 of the Act or the company’s Memorandum of Incorporation.  A director must not approve a distribution despite knowing that the distribution was not in accordance with Section 46 of the Act, or in respect of the acquisition by the company of any of its shares or the shares of its holding company, in contravention of Sections 46 or 48, or any allotment by the company of its shares despite knowing that the allotment was contrary to the provisions of the Act.

Section 218(2) of the Act provides that 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”. Therefore, Section 218 as read with Sections 77 and 22 will allow creditors to hold directors personally liable for the debts or losses of the company if its business was knowingly carried on recklessly, with gross negligence or with intent to defraud any person or for any fraudulent purpose.

Original article by our partner, Caveat legal, here: http://www.caveatlegal.com/directors-dos-and-dontsdirectors-dos-and-donts/

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