Corporate governance and directors' duties in South Africa: overview

A Q&A guide to corporate governance law in South Africa.

The Q&A gives a high level overview of board composition, the comply or explain approach, management rules and authority, directors’ duties and liabilities, transactions with directors and conflicts, company meetings, internal controls, accounts and audit, institutional investors and reform proposals.

To compare answers across multiple jurisdictions, visit the Corporate Governance Country Q&A tool.

The Q&A is part of the global guide to corporate governance law. For a full list of jurisdictional Q&As visit www.practicallaw.com/corpgov-guide.

Morné van der Merwe, Baker & McKenzie
Contents

Corporate governance trends

1. What are the main recent corporate governance trends and reform proposals in your jurisdiction?

The King Code of Governance

The King Report on Governance for South Africa 2009, as read with the King Code of Governance for South Africa 2009 (collectively King III), supplements the requirements of the Companies Act No. 71 of 2008 (Companies Act) in relation to corporate governance requirements.

Companies listed on the Johannesburg Stock Exchange (JSE) are required to comply with King III, but compliance is merely encouraged for non-listed companies (King III is considered "soft law").

Answers to the questions below include King III requirements.

CRISA

The Code for Responsible Investing in South Africa (CRISA) came into effect in 2012 in response to King III and requires companies to apply the principles of King III and, if not, to explain why the principles are not applied. CRISA applies to institutional investors as asset owners, (pension funds and insurance companies) as well as to service providers of institutional investors (asset and fund managers). The purpose of CRISA is to promote sound governance by providing guidance for institutional investors and service providers on how investment analysis and investment activities should be executed. CRISA encourages companies to apply sound governance principles through investee companies' share ownership.

IRC

In 2010 the Integrated Reporting Committee (IRC) was established to develop guidelines on good practice in integrated reporting. The IRC has a constitution where its objectives are stated for corporate entities.

 
2. What are the main forms of corporate entity used in your jurisdiction?

Public companies

Public company characteristics include that:

  • There is a minimum of one shareholder and three directors.

  • The company's Memorandum of Incorporation (MOI) does not restrict the right to transfer shares of the company to the public.

  • Public companies are identified by the suffix "Limited" or "Ltd".

Private companies

Limited liability (private company) characteristics include that:

  • There is a separate legal personality and limited liability.

  • There is no requirement for local shareholders or directors.

  • The company's MOI must restrict the right to transfer the shares of the company and prohibit any offer to the public for the subscription of any shares or debentures of the company.

  • There is a minimum of one shareholder and at least one director.

  • Private companies are identified by the suffix "Proprietary Limited" or "(Pty) Ltd".

Personal liability companies

A personal liability company is a company that:

  • Meets the requirements of a private company.

  • Also includes in its MOI that the directors and past directors of the company are jointly and severally liable, together with the company, for any debts and liabilities of the company as are or were contracted during their respective periods of office.

A personal liability company is identified by the suffix "Incorporated" or "Inc".

Non-profit company

Non-profit companies and not-for-gain associations can also be incorporated under the Companies Act. These companies must:

  • Have a public benefit object or an object relating to one or more cultural or social activities, communal or group interests.

  • Apply all of its assets and income to advance its stated objects.

  • Have at least three directors.

Income and property are not distributable to its incorporators, members, directors or officers, except as reasonable compensation for services rendered or as reimbursement for expenses incurred in carrying out the company's objectives. A non-profit company is identified by the suffix "NPC".

Branch office (external company)

A foreign company not wishing to incorporate a subsidiary in South Africa may set up a branch office or "external company" in terms of the Companies Act No. 71 of 2008.

A foreign company must register as an "external company" within twenty business days after it first begins to "conduct business, or non-profit activities", as the case may be, within South Africa and is regarded as conducting business in South Africa if it is either:

  • A party to one or more employment contracts in South Africa.

  • Engaging in a course of conduct or in a course or pattern of activities in South Africa over a period of at least six months, that would lead a person to reasonably conclude that the company intended to continually engage in business activities in South Africa.

 

Legal framework

3. Outline the main corporate governance legislation and authorities that enforce it. How influential are institutional investors and other shareholder groups in monitoring and enforcing good corporate governance? List any such groups with significant influence in this area.

Private companies

Private companies are regulated by the Companies Act No. 71 of 2008.

Private companies are encouraged to follow the guidelines of the King Report on Governance for South Africa 2009, as read with the King Code of Governance for South Africa 2009 (collectively King III).

Public companies

Public Companies are regulated by the Companies Act No. 71 of 2008, as well as bound by:

  • King III.

  • Johannesburg Stock Exchange (JSE) Listings Requirements.

King III was written from the perspective of the board as the focal point of corporate governance. However, the King Committee believes that a code should be drafted to specifically set out the expectations on institutional investors in ensuring companies apply the principles and recommended practices effectively. The code should encourage action that ensures all role players in the investment chain become aware of their duties. Even though more than 20 asset managers and owners have signed the Principles for Responsible Investment (PRI), few are voting and disclosing their votes. Institutional investors should at the very least follow the guidelines laid down by the International Corporate Governance Network (ICGN).

Currently, there is no legislation in South Africa that allows for institutional investors or shareholder groups to monitor and enforce good corporate governance. However, there is an ever-increasing responsibility on companies to ensure they have good corporate governance structures in place and these groups are therefore becoming fairly influential in monitoring and enforcing good corporate governance.

 
4. Has your jurisdiction adopted a corporate governance code?

South Africa has adopted the King III, which covers for the following:

  • Ethical leadership and corporate citizenship.

  • Boards and directors.

  • Audit committees.

  • Governance of risk and information technology.

  • Compliance with laws, rules, codes and standards.

  • Internal audits.

  • Governing stakeholder relationships.

  • Integrated reporting and disclosure.

Companies listed on the Johannesburg Stock Exchange (JSE) are required to comply with the King Report on Governance for South Africa 2009, as read with the King Code of Governance for South Africa 2009 (collectively King III), but compliance is merely encouraged for non-listed companies.

For companies subscribing to King III, it is applied on an "apply or explain" basis.

Therefore, it is the duty of directors to act in the best interests of the company and in following the "apply or explain" approach, the board could conclude that following a recommendation is not, in the circumstances, in the best interests of the company. The board can decide to apply the recommendation differently or apply another practice and still achieve the principles of fairness, accountability, responsibility and transparency. Compliance is achieved by explaining how the principles and recommendations were applied, or if not applied, the reasons for not doing so.

The "apply or explain" approach requires more consideration, stakeholder involvement, thought-process and explanation of what has actually been done to implement the principles and best practice recommendations of governance.

 

Corporate social responsibility and reporting

5. Is it common for companies to report on social, environmental and ethical issues? Highlight, where relevant, any legal requirements or non-binding guidance/best practice on corporate social responsibility.

With the King Report on Governance for South Africa 2009, as read with the King Code of Governance for South Africa 2009 (collectively King III), the board must ensure the integrity of the company's integrated report. Integrated reporting is the holistic and integrated representation of the company's performance for both its finances and its sustainability.

Reporting should be integrated across all areas of performance, reflecting the choices made in the strategic decisions adopted by the board, and should include reporting in the context of economic, social and environmental issues. The key considerations are whether the information provided has allowed stakeholders to understand the:

  • Key issues affecting the company.

  • Effect the company's operation has had on the economic, social and environmental wellbeing of the community, both positive and negative.

The Minister may prescribe that certain categories of companies must have a social and ethics committee in relation to annual turnover, size and nature of workforce (section 72(4), Companies Act No. 71 of 2008). The functions of the committee are wide ranging and its main function is that of monitoring the company's activities, having regard to:

  • Relevant legislation.

  • Other legal requirements or prevailing codes of best practice in the field of:

    • social and economic development;

    • good corporate citizenship;

    • the environment;

    • health and public safety;

    • consumer relationships;

    • labour and employment.

 

Board composition and restrictions

6. What is the management/board structure of a company?

Structure

Under the King Report on Governance for South Africa 2009, as read with the King Code of Governance for South Africa 2009 (collectively King III), the appropriate structure for companies is the unitary board structure for executive directors and non-executive directors interacting in a working group. The unitary system is well established.

Management

Generally, the elected board of directors manage the business of the company. A director, may however, be employed as Chief Operating Officer or Chief Executive Officer (CEO) and in that way be involved in the management of the company. Depending on the corporate structure of the company and the contents of the Memorandum of Incorporation (MOI) and/or shareholders' agreement, managers or a management board can be appointed to manage the company.

Board members

The elected directors sit on the board. The MOI can make provision for the directors to elect a chairperson of their meetings and determine the period of time for which he holds office.

Employees' representation

The general consensus is that no employee representation is required, but such representation depends on what the company's MOI states.

Number of directors or members

The minimum number of directors is at least:

  • Three directors for public or non-profit company.

  • One director for a private or personal liability company.

The MOI may require the company to have a higher number of minimum directors. There is no maximum number of directors.

 
7. Are there any general restrictions or requirements on the identity of directors?

Age

A director must be at least 18 years of age.

Nationality

There are no restrictions or requirements regarding the nationality of a director.

Gender

There are no restrictions or requirements on the gender of a director.

The King Report on Governance for South Africa 2009, as read with the King Code of Governance for South Africa 2009 (collectively King III) requires the board to be balanced, not only with executive and non-executive directors, but also considering age, nationality, diversity, gender and experience. The board should consider whether its size, diversity and demographics make it effective. King III recommends that the executive officer and finance director serve as the executive directors on a board. The Companies Act No. 71 of 2008 requires that listed companies appoint a financial director to the board. The composition of the board, as well as the qualifications, age and race of all board members should be disclosed annually in the company's integrated report.

Disqualifications

The following are disqualified from being directors of a company (section 69, Companies Act No. 71 of 2008):

  • A person prohibited by a court of law from becoming a director.

  • A person declared a delinquent by a court of law.

  • An unrehabilitated insolvent.

  • A person prohibited by any public regulation from being a director of a company.

  • A person removed from an office of trust on the grounds of misconduct involving dishonesty.

  • A person convicted, in South Africa or elsewhere, and imprisoned without the option of a fine or fined more than the prescribed amount for theft, fraud, forgery, perjury or other offences specified in section 69(8)(b)(iv) of the Companies Act No. 71 of 2008.

 
8. Are non-executive, supervisory or independent directors recognised or required?

Recognition

Non-executive, supervisory or independent directors are recognised but not required.

Under the King Report on Governance for South Africa 2009, as read with the King Code of Governance for South Africa 2009 (collectively King III), the board must ensure that there is an appropriate balance of power and authority on the board. No one individual or block of individuals should be able to dominate the board's decision-making. Therefore the board should comprise of a majority of non-executive directors. The majority of non-executive directors should be independent as this reduces the possibility of conflicts of interest and promotes objectivity. Independent non-executive directors should be independent in fact and in the perception of a reasonably informed outsider. An independent director should be independent in character and judgement and there should be no relationships or circumstances that are likely to affect, or could appear to affect, this independence. Independence is the absence of undue influence and bias that can be affected by the intensity of the relationship between the director and the company rather than any particular fact such as length of service or age.

Board composition

A board of directors, or part of the board of directors, is not required to consist of independent directors.

Independence

Under King III, an independent non-executive director is a non-executive director that:

  • Is not a representative of a shareholder that has the ability to control or significantly influence management or the board.

  • Does not have a direct or indirect interest in the company (including any parent or subsidiary in a consolidated group with the company) that exceeds 5% of the group's total number of shares in issue.

  • Does not have a direct or indirect interest in the company that is less than 5% of the group's total number of shares in issue, but is material to his personal wealth.

  • Has not been:

    • employed by the company or the group of which it currently forms a part in any executive capacity;

    • appointed as the designated auditor or partner in the group's external audit firm;

    • appointed senior legal adviser for the preceding three financial years.

  • Is not a member of the immediate family of an individual who is, or has during the preceding three financial years, been employed by the company or the group in an executive capacity.

  • Is not a professional adviser to the company or the group, other than as a director.

  • Is free from any business or other relationship (contractual or statutory) that could be seen by an objective outsider to interfere materially with the individual's capacity to act in an independent manner, such as being a director of a material customer of, or supplier to, the company.

  • Does not receive remuneration contingent on the performance of the company.

Under King III, the board should consist of a majority of non-executive directors. The majority of non-executive directors should be independent as this reduces the possibility of conflicts of interest and promotes objectivity.

 
9. Are the roles of individual board members restricted?

The roles of individual board members is not generally restricted. However, the Memorandum of Incorporation (MOI) can provide otherwise.

The King Report on Governance for South Africa 2009, as read with the King Code of Governance for South Africa 2009 (collectively King III) states that the Chief Executive Officer (CEO) of the company should not also fulfil the role of chairman of the board. The board should elect a chairman that can provide the direction necessary for an effective board.

 
10. How are directors appointed and removed? Is shareholder approval required?

Appointment of directors

Each incorporator of a company is a first director of the company, and serves until sufficient other directors to satisfy the minimum requirements of the Companies Act No. 71 of 2008, or the company's Memorandum of Incorporation (MOI), have been appointed or elected in accordance with the Companies Act No. 71 of 2008 or the company's MOI (section 67, Companies Act No. 71 of 2008). If the number of incorporators of a company, together with any ex officio directors, is fewer than the minimum number of directors required for that company in terms of the Companies Act No. 71 of 2008 or the company's MOI, the board must call a shareholders' meeting. This meeting must be called within 40 business days after incorporation of the company for the purpose of electing sufficient directors to fill all vacancies on the board at the time of the election.

Each director of a profit company, other than the first director or a director contemplated in section 66 of the Companies Act No. 71 of 2008, must be elected by those entitled to exercise voting rights in such an election, to serve for an indefinite term, or for a term as set out in the MOI (section 68, Companies Act No. 71 of 2008) Unless the MOI of a profit company provides otherwise, the election of directors is to be conducted by way of a series of votes, with the series of votes continuing until all vacancies on the board at that time have been filled.

The board can appoint a person that satisfies the requirements for election as a director to fill any vacancy and serve as a director of the company on a temporary basis until the vacancy has been filled by election (section 68(2), Companies Act No. 71 of 2008). During that period, anyone appointed has all of the powers, functions and duties and is subject to all of the liabilities of any other director of the company, unless the MOI of a profit company provides otherwise.

Removal of directors

A director may be removed by an ordinary resolution adopted at a shareholders' meeting by the persons entitled to exercise voting rights in an election of that director (section 71(1), Companies Act No. 71 of 2008) despite anything to the contrary in:

  • A company's MOI or rules.

  • Any agreement between a company and a director.

  • Any agreement between any shareholders and a director.

Before the shareholders of a company can consider a resolution, the director concerned must be given notice of the meeting and the resolution, which must be at least equivalent to what a shareholder is entitled to receive, irrespective of whether or not the director is a shareholder of the company. The director must be given reasonable opportunity to make a presentation in person or through a representative to the meeting, before the resolution is put to a vote (section 71(2), Companies Act No. 71 of 2008).

If a company has more than two directors, the board, other than the director concerned, must determine the following by resolution, where a shareholder or director has alleged that a director of the company has become (section 71(3), Companies Act No. 71 of 2008):

  • Ineligible or disqualified in terms of the Companies Act No. 71 of 2008.

  • Incapacitated to the extent that the director is unable to perform the functions of a director, and is unlikely to regain that capacity within a reasonable time.

  • Has neglected, or been derelict in the performance of, the functions of director.

The board can remove a director that it has determined to be:

  • Ineligible or disqualified.

  • Incapacitated.

  • Negligent.

  • Derelict.

 
11. Are there any restrictions on a director's term of appointment?

A director is elected to serve as a director for an indefinite term or for a term set out in the Memorandum of Incorporation (MOI) (section 68, Companies Act No. 71 of 2008). However, a director, can be employed by a separate service contract with the company and this service contract can contain terms on the director's terms of appointment. Although a director can be employed indefinitely, he may nevertheless be removed as a director by ordinary resolution.

 

Directors' remuneration

12. Do directors have to be employees of the company? Can shareholders inspect directors' service contracts?

Directors employed by the company

A director is not an employee of a company and does not have to be an employee in order to be a director. A director that enters into a contract of employment with the company becomes both an employee and director of the company.

Shareholders' inspection

Although not having direct inspection rights, shareholders' can have access to the annual financial statements that must disclose, amongst other things, details of the service contracts of current directors and prescribed officers (section 30, Companies Act No. 71 of 2008).

 
13. Are directors allowed or required to own shares in the company?

Directors can own shares in the company but are not required to do so.

 
14. How is directors' remuneration determined? Is its disclosure necessary? Is shareholder approval required?

Determination of directors' remuneration

Remuneration is usually agreed upon between the company and the director. Under the King Report on Governance for South Africa 2009, as read with the King Code of Governance for South Africa 2009 (collectively King III), companies should adopt remuneration policies and practices for executives that create long-term value for the company. The policies and practices should be:

  • Aligned with the company's strategy.

  • Reviewed regularly.

  • Be linked to the executive's contribution to company performance.

King III recommends that companies should appoint a remuneration committee to assist the board of directors in setting and administering remuneration policies. The committee considers and recommends remuneration policies for all levels in the company, but should be especially concerned with the remuneration of senior executives, including executive directors, and should also advise on the remuneration of non-executive directors. In proposing the remuneration policy, the remuneration committee should ensure a mix of fixed and variable pay, in cash, shares and other elements. The remuneration committee should scrutinise all benefits, including pensions, benefits in kind and other financial arrangements, to ensure they are justified, correctly valued and suitably disclosed. The proceedings of the remuneration committee should be governed by terms of reference approved by the board. In setting remuneration policies, the remuneration committee should ensure that remuneration levels reflect the contribution of senior executives and executive directors and should be rigorous in selecting an appropriate comparative group when comparing remuneration levels. There should be a balance between the fixed components and the bonus component of total remuneration of executives so as to allow for a fully flexible bonus scheme.

Non-executive director fees should:

  • Recognise the responsibilities borne by directors throughout the year and not only during meetings (including committee fees). It should consist of a base fee that can vary according to factors including the level of expertise of each director, as well as an attendance fee per meeting.

  • Be approved by shareholders in advance. The Companies Act No. 71 of 2008 requires a special resolution at intervals of no more than two years for this purpose.

The remuneration committee should regularly review incentive schemes to ensure their continued contribution to shareholder value. Participation in share incentive schemes should be restricted to employees and executive directors, and should have appropriate limits for individual participation, which should be disclosed.

To align shareholders' and executives' interests, vesting of share incentive awards should be conditional on achieving performance conditions.

Disclosure

Under King III, companies should provide full disclosure of each individual executive and non-executive director's remuneration, giving details as required in the Companies Act No. 71 of 2008 of:

  • Base pay.

  • Bonuses.

  • Share-based payments.

  • Granting of options or rights.

  • Restraint payments.

  • All other benefits (including present values of existing future awards).

Similar information should be provided for those falling within the definition of prescribed officers of the company as defined in the Companies Act No. 71 of 2008.

In its annual remuneration report, to be included in the integrated report, the company should:

  • Explain the remuneration policies followed throughout the company with a special focus on executive management.

  • Explain the strategic objectives that it seeks to achieve.

  • Provide clear disclosure of the implementation of those policies.

Shareholder approval

King III also recommends that shareholders should approve the company's remuneration policy.

 

Management rules and authority

15. How is a company's internal management regulated? For example, what is the length of notice and quorum for board meetings, and the voting requirements to pass resolutions at them?

Board meetings are provided for by section 73 of the Companies Act No. 71 of 2008. A director authorised by the board of a company:

  • Can call a meeting of the board at any time.

  • Must call such a meeting if required to do so by at least:

    • 25% of the directors in the case of a board that has at least 12 members;

    • two directors, in any other case.

A company's Memorandum of Incorporation (MOI) can specify a higher or lower percentage or number.

Except to the extent that the Companies Act No. 71 of 2008 or a company's MOI provides otherwise, so long as the electronic communication facility ordinarily used allows everyone participating in a meeting to communicate concurrently with each other without an intermediary, and to participate effectively in the meeting, then either:

  • A meeting of the board can be conducted by electronic communication.

  • One or more directors can participate in a meeting by electronic communication.

The board of a company can determine the form and time for giving notice of its meetings, but the determination must comply with any requirements set out in the MOI, or rules, of the company. No meeting of a board can be convened without notice to all of the directors.

A majority of the directors must be present at a meeting before a vote can be called at a meeting of the directors. Each director has one vote on a matter before the board and a majority of the votes cast on a resolution is sufficient to approve that resolution.

A company must keep minutes of the meetings of the board and include in the minutes any declaration given by notice or made by a director and every resolution adopted by the board.

 
16. Can directors exercise all the powers of the company or are some powers reserved to the supervisory board (if any) or a general meeting? Can the powers of directors be restricted and are such restrictions enforceable against third parties?

Directors' powers

Powers can be reserved as shareholder or board matters.

Restrictions

The Memorandum of Incorporation (MOI) can restrict directors' powers.

Also, where a director's powers are used for an improper purpose, a transaction with a third party is only voidable against the third party if that party knew the director was acting for an improper purpose.

 
17. Can the board delegate responsibility for specific issues to individual directors or a committee of directors? Is the board required to delegate some responsibilities, for example for audit, appointment or directors' remuneration?

The board can delegate responsibility for specific issues to individual directors or a committee of directors, but this is not required. The board can delegate any responsibility to management, board committees or individual board members or persons, on the basis that these duties may not be abdicated (section 72, Companies Act No. 71 of 2008).

The exception to this is that the statutory duties of the audit committee must remain the sole responsibility of the members of the audit committee.

Under the King Report on Governance for South Africa 2009, as read with the King Code of Governance for South Africa 2009 (collectively King III), it is recommended that companies should appoint the following committees:

  • An audit committee to oversee the internal audit.

  • A remuneration committee to assist the board of directors in setting and administrating remuneration policies.

  • A nomination committee to assist with the process of identifying suitable candidates for the board of directors.

  • A risk management committee to assist the board of directors in carrying out its risk responsibilities.

 

Directors' duties and liabilities

18. What is the scope of a director's general duties and liability to the company, shareholders and third parties?

Directors' duties

A director of a company:

  • Must exercise reasonable care and skill. Under the Companies Act No. 71 of 2008, the fiduciary duties are:

    • mandatory;

    • prescriptive;

    • unalterable;

    • apply to all companies.

  • Has, under the Companies Act No. 71 of 2008, the power and duty to manage the business of the company on directors. The directors owe their fiduciary duties to the company (that is the collective body of shareholders) as a whole.

  • Must not use the position of director, or any information obtained while acting in the capacity of a director, to:

    • gain an advantage for the director;

    • knowingly cause harm to the company or a subsidiary of the company.

  • Must communicate to the board any information that comes to the director's attention, unless that information:

    • is immaterial to the company;

    • is generally available to the public;

    • is known to the other directors;

    • is not to be disclosed by a director who is bound by a legal or ethical obligation of confidentiality.

  • When acting in that capacity, must exercise the powers and perform the functions of director:

    • in good faith and for a proper purpose;

    • in the best interests of the company;

    • with the degree of care, skill and diligence that may reasonably be expected.

  • May be held liable under the principles of the common law relating to the breach of a fiduciary duty, for any loss, damage or costs sustained by the company as a consequence of any breach by the director of a statutory duty in respect of the:

    • disclosure of personal financial interests;

    • the use of position or information obtained whilst acting as a director;

    • the breach of the statutory duty in respect of acting in good faith or a proper purpose and with the requisite skill and diligence.

Directors' liability

For the purposes of liability of directors in the Companies Act No. 71 of 2008, a "director" is defined as "including an alternate director, and a prescribed officer or a person who is a member of a committee of a board of a company, or of the audit committee of a company, irrespective of whether or not the person is also a member of the company's board."

Liability of directors is covered under section 77 of the Companies Act No. 71 of 2008. A director of a company can also be held liable under:

  • The principles of common law relating to delict for any loss, damage or costs sustained by the company as a consequence of any breach by the director of a duty of care, skill and diligence.

  • Any provision of the Companies Act No. 71 of 2008.

  • Any provision of the company's Memorandum of Incorporation (MOI).

The liability of a director that fails to vote against a resolution approving prohibited distribution arises only if immediately after making all of the distribution, the company does not satisfy the solvency and liquidity test, and it was unreasonable at the time of the decision to conclude that the company would satisfy the solvency and liquidity test after making the relevant distribution. Proceedings to recover any loss, damages or costs that a person is, or may be held, liable for under this provision cannot start more than three years after the act or omission that gave rise to that liability.

In any proceedings against a director, other than for wilful misconduct or wilful breach of trust, the court can relieve the director, either wholly or partly, from any liability, on any terms the court considers just if it appears to the court that:

  • The director is or may be liable, but has acted honestly and reasonably.

  • Having regard to all the circumstances of the case, including those connected with the appointment of the director, it would be fair to excuse the director.

 
19. Briefly outline the regulatory framework for theft, fraud, and bribery that can apply to directors.

In terms of the Prevention and Combating of Corrupt Activities Act (POCA) No. 12 of 2004, any director who, directly or indirectly, does the following, is guilty of the offence of corrupt activities:

  • The director:

    • accepts or agrees or offers to accept any gratification from any other person, whether for the benefit of himself or herself or for the benefit of another person; or

    • gives or agrees or offers to give to any person any gratification, whether for the benefit of that person or for the benefit of another person;

  • In order to act, personally or by influencing another person so to act, in a manner:

    • that amounts to the illegal, dishonest, unauthorised, incomplete, or biased, or misuse or selling of information or material acquired in the course of the exercise, carrying out or performance of any powers, duties or functions arising out of a constitutional, statutory, contractual or any other legal obligation;

    • that amounts to the abuse of a position of authority, a breach of trust, or the violation of a legal duty or a set of rules;

    • designed to achieve an unjustified result; or

    • that amounts to any other unauthorised or improper inducement to do or not to do anything.

Any person that holds a position of authority and that knows or ought reasonably to have known or reasonably suspected that any other person has committed fraud involving an amount of R100,000 or more must report such knowledge or suspicion or cause such knowledge or suspicion to be reported to any police official (section 34, POCA No. 12 of 2004). A failure to do so is a criminal offence.

Criminal liability arises if an act of fraud has been perpetrated by any person in relation to a company, its creditors or employees (section 214, Companies Act No. 71 of 2008).

A company must not carry on its business recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose (section 22(1), Companies Act No. 71 of 2008). Any director of a company is liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of the director (section 77(3)(b), Companies Act No. 71 of 2008):

  • Agreeing to carry on the company's business despite knowing that it was being conducted in a manner prohibited by section 22(1) of the Companies Act No. 71 of 2008.

  • Being party to an act or omission by the company despite knowing that the act or omission was calculated to defraud a company creditor, employee or shareholder or had another fraudulent purpose.

 
20. Briefly outline the potential liability for directors under securities laws.

If securities are offered to the public for subscription or sale pursuant to a prospectus, then the following persons are liable to compensate any person that acquired securities on the faith of the prospectus for any loss or damage the person sustains as a result of any untrue statement in the prospectus, or in any report or memorandum appearing on the face of it to have been issued with, or incorporated by reference in, the prospectus (section 104, Companies Act No. 71 of 2008):

  • Anyone that becomes a director between the issuing of the prospectus and the holding of the first general shareholders meeting at which directors are elected or appointed.

  • Anyone that consents to be named in the prospectus as a director, or agrees to become a director either immediately or after an interval of time.

  • Promoter of the company.

  • Anyone that is authorised the issue of the prospectus or, under the Companies Act No. 71 of 2008, is regarded as having authorised the issue of the prospectus or made that offer to the public.

It is sufficient for a plaintiff to prove that the statement was untrue, it does not have to be proven that it was made fraudulently.

Such liability is in addition to the liability of a director of the company provided for in the general statutory provision relating to directors' liability.

The statutory liability for untrue statements in a prospectus read with the changes required by the context, applies equally in respect of any other person whose consent is required in terms of the Companies Act No. 71 of 2008 in connection with anything contained in a prospectus, and who has either not given that consent or withdrawn consent before the issue of the prospectus.

A person that, by reason of being one of the following, has satisfied any liability under this provision by making a payment to another person, may recover a contribution, as in cases of contract, from any other person, who, if sued separately, would have been liable to make the same payment, unless the person who has satisfied such liability was, and that other person was not, guilty of fraudulent misrepresentation:

  • Being a director, or having been named as a director.

  • Having agreed to become a director.

  • Having authorised the issue of the prospectus.

  • Having become a director between the issue of the prospectus and the holding of the first general shareholders meeting at which directors are elected or appointed.

A director of the company is liable if he was present at a meeting when the board approved the issue of any unauthorised shares, or participated in the making of such a decision in terms of section 74 of the Companies Act No. 71 of 2008 and failed to vote against the issue of those shares, despite knowing that the shares had not been authorised in accordance with section 36 of the Companies Act No. 71 of 2008 (section 77(3)(e)(i), Companies Act No. 71 of 2008).

Insider trading is covered by section 78 of the Financial Markets Act (FMA) No. 19 of 2012, which states that an insider commits an offence in the following circumstances:

  • He knows that he has inside information and deals directly or indirectly or through an agent for his own account in the securities listed on a regulated market to which the inside information relates or which are likely to be affected by it.

  • He knows that he has inside information and deals, directly or indirectly or through an agent for any other person in the securities listed on a regulated market to which the inside information relates or which are likely to be affected by it.

  • He deals for an insider directly or indirectly or through an agent in the securities listed on a regulated market to which the inside information possessed by the insider relates or which are likely to be affected by it, who knew that such person is an insider.

  • He knows that he has inside information and discloses the inside information to another person.

  • He knows that he has inside information and encourages or causes another person to deal or discourages or stops another person from dealing in the securities listed on a regulated market to which the inside information relates or which are likely to be affected by it.

However, an insider can prove on a balance of probabilities that he has complied with certain circumstances that may make him not guilty of the above offence.

No person can, either for their own account or on behalf of another person, knowingly directly or indirectly use or participate in any practice that has created, or is likely to have the effect of creating, a false or deceptive appearance of the demand for, supply of, or trading activity in connection with (or an artificial price for) that security (section 80, FMA No. 19 of 2012). He must have reasonably known that he is participating in the above practice.

No person can, directly or indirectly, make or publish in respect of securities traded on a regulated market, or in respect of the past or future performance of a company whose securities are listed on a regulated market (section 81, FMA No. 19 of 2012):

  • Any statement, promise or forecast that is, at the time and in the light of the circumstances in which it is made, false or misleading or deceptive in relation to any material fact and which the person knows, or ought reasonably to know, is false, misleading or deceptive.

  • Any statement, promise or forecast that is, by reason of the omission of a material fact, rendered false, misleading or deceptive and which the person knows, or ought reasonably to know, is rendered false, misleading or deceptive by reason of the omission of that fact.

 
21. What is the scope of a director's duties and liability under insolvency laws?

Insolvency

Liquidation. Chapter 14 of the Companies Act No. 61 of 1973 (Old Companies Act) (the provisions of which have not yet been repealed by the Companies Act) governs, in conjunction with the Companies Act, the duties and obligations of directors of a company being liquidated as follows:

  • All powers of directors cease from the commencement of voluntary wind-up of a company, except to the extent specifically authorised (section 80, Companies Act No. 71 of 2008):

    • in the case of a winding-up by the company, by the liquidator or the shareholders in a general meeting;

    • in the case of a winding-up by creditors, the liquidator or the creditors.

  • It is intended to pass a resolution for a creditors' voluntary winding-up of a company, the directors of that company must make, or cause to be made, a statement on the affairs of the company and lay it before the meeting convened for the purpose of passing such a resolution (section 363, Old Companies Act).

  • Where an order for the winding-up of a company has been made by the court, the following must make or cause to be made, such statement as to the affairs of the company and lodge two copies with the Master (section 363, Old Companies Act):

    • the person who at the time of the winding-up order were directors and officers of the company;

    • such persons who have been directors of officers of the company or who participated in its formation, at any time within one year before the winding-up order, as may be required to do so by the Master.

  • Directors must immediately notify the liquidator of a change of their address following the commencement of the winding-up of a company, but before the liquidators final account has been confirmed (section 363A, Old Companies Act).

  • In a winding-up of a company that cannot pay its debts, every director and officer of the company shall (section 414, Old Companies Act):

    • attend the first and second meetings of the creditors of the company, including any such meeting that is adjourned, unless the Master or the officer presiding or due to preside as any such meeting has, after consultation with the liquidator, authorised him in writing to be absent from that meeting;

    • attend any subsequent meeting or adjourned meeting of creditors of the company that the liquidator has in writing required him to attend. Any director that fails to comply with section 414 of the Old Companies Act is guilty of an offence.

  • Directors can be interrogated by a liquidator in a meeting of the creditors.

  • Personal liability of delinquent directors (section 423, Old Companies Act): where in the course of the winding-up of a company it appears that any past or present director has misapplied or retained or become liable or accountable for any money or property of the company or has been guilty of a breach of faith or trust in relation to the company the Court can:

    • enquire into the conduct of the director;

    • order him to repay or restore the money or property or any part, with interest at such rate as the Court thinks just;

    • order him to contribute a sum to the assets of the company by way of compensation in respect of the misapplication, retention, breach of faith or trust as the Court thinks just.

  • Liability of directors for fraudulent conduct of business (section 424, Old Companies Act): when it appears during the winding-up of a company that any business of the company was or is being carried on recklessly or with the intent to defraud creditors of the company or the creditors of any other person or for any fraudulent purpose, the Court can declare that any person that was knowingly party to the carrying on of the business in this way is personally responsible, without any limitation of liability, for all of the debts or other liabilities of the company as the Court may direct.

  • Private Prosecution of directors (section 426, Old Companies Act): if it appears in the course of the winding-up of a company that any past or present director of the company has been guilty of an offence that he is criminally liable for under the Old Companies Act, or, in relation to the company or the creditors of the company under the common law, the liquidator will require all the facts known to him that appear to constitute the offence be laid before the Attorney-General concerned. If the Attorney-General certifies that he declines to prosecute, the liquidator can, subject to the provisions of section 386(3) and (4) of the Old Companies Act, institute and conduct a private prosecution for these offences.

Reckless Trading. This:

  • Is provided for by Section 22 of the Companies Act No. 71 of 2008 which prohibits a company from trading under insolvent circumstances.

  • Imposes a statutory duty on the directors of a company to avoid insolvent trading. The object of this section is to deter directors from abusing the privilege of limited liability at the expense of creditors.

  • Provides that directors that ignore this section run the risk of being declared delinquent directors and of being held personally liable for loss or damage suffered by some other person as a result of a contravention of section 22 of the Companies Act No. 71 of 2008.

Business rescue proceedings

The Companies Act No. 71 of 2008 provides for a form of company administration by an independent 'business rescue practitioner' if there is financial distress of the company (business rescue proceedings) (sections 129-154, Companies Act No. 71 of 2008).

Under section 129 of the Companies Act No. 71 of 2008, the board of a company:

  • Can resolve that the company voluntarily begin business rescue proceedings and place the company under supervision.

  • Must commence these proceedings if the board has reasonable grounds to believe that:

    • the company is financially distressed;

    • there appears to be a reasonable prospect of rescuing the company.

During a company's business rescue proceedings, each director of the company (section 137, Companies Act No. 71 of 2008):

  • Must continue to exercise the functions of director, subject to the authority of the practitioner.

  • Has a duty to the company to exercise any management function within the company with the express instructions or direction of the practitioner, to the extent that it is reasonable to do so.

  • Remains bound by the requirements of section 75 of the Companies Act No. 71 of 2008 concerning personal financial interests of the director or a related person.

  • To the extent that the director acts in accordance with section 137(2)(b) and (c) of the Companies Act No. 71 of 2008, is relieved from the duties of a director as set out in section 76 of the Companies Act No. 71 of 2008, and the liabilities set out in section 77 of the Companies Act No. 71 of 2008, other than section 77 (3)(a), (b) and (c) of the Companies Act No. 71 of 2008.

  • Must deal with the requests of the practitioner at all times, and provide the practitioner with any information about the company's affairs that may reasonably be required.

At any time during the business rescue proceedings, the business rescue practitioner can apply to a court for an order removing a director from office on the grounds that the director has:

  • Failed to comply with a requirement of this Chapter.

  • By act or omission, has impeded, or is impeding:

    • the practitioner in the performance of the powers and functions of practitioner;

    • the management of the company by the practitioner;

    • the development or implementation of a business rescue plan in accordance with this Chapter.

As soon as practicable after business rescue proceedings begin (section 142, Companies Act No. 71 of 2008):

  • Each director of a company must deliver to the practitioner all books and records that relate to the affairs of the company and are in the director's possession.

  • Any director of a company that knows where other books and records relating to the company are being kept, must inform the practitioner as to the whereabouts of those books and records.

  • Within five business days after business rescue proceedings begin, or a longer period as the business rescue practitioner allows, the directors of a company must provide the business rescue practitioner with a statement of affairs containing, at the very least, the following:

    • any material transactions involving the company or the assets of the company, and occurring within 12 months immediately before the business rescue proceedings began;

    • any court, arbitration or administrative proceedings, including pending enforcement proceedings, involving the company;

    • the assets and liabilities of the company, and its income and disbursements within the immediately preceding 12 months;

    • the number of employees, and any collective agreements or other agreements relating to the rights of employees;

    • any debtors and their obligations to the company;

    • any creditors and their rights or claims against the company.

 
22. Briefly outline the potential liability for directors under environment and health and safety laws.

Employers must provide and maintain a safe and healthy risk-free working environment. Every Chief Executive Officer (CEO) must, as far as is reasonably practicable, ensure that the duties of his employer are properly discharged (section 16, Occupational Health and Safety Act No. 85 of 1993). Without derogating from his responsibility or liability, a CEO can assign any duty to any person under his control and that person must act under the control and directions of the CEO.

A person that is, or was, a director when the company commits an offence under various environmental laws, is liable to penalties if the offence resulted from the director's failure to take all reasonable steps necessary to prevent the offence.

 
23. Briefly outline the potential liability for directors under anti-trust laws.

Currently, there are no specific criminal penalties for directors that breach the anti-trust provisions of the Competition Act No. 89 of 1998.

However, a director commits an offence under section 73 of the Competition Act No. 89 of 1998, if he:

  • Does anything intending to improperly influence the Competition Tribunal or Competition Commission concerning any matter connected with an investigation.

  • Anticipates any findings of the Tribunal or Commission concerning an investigation in a way that is calculated to influence the proceedings or findings.

  • Does anything in connection with an investigation that would have been contempt of court if the proceedings had occurred in a court of law.

  • Knowingly provides false information to the Commission.

  • Defames the Tribunal or the Competition Appeal Court, or a member of either of them, in their respective official capacities.

  • Wilfully interrupts the proceedings or misbehaves in the place where a hearing is being conducted.

  • Acts contrary to a warrant to enter and search.

  • Without authority, enters or searches premises or attaches or removes an article or document.

  • Contravenes or fails to comply with an interim or final order of the Competition Tribunal or the Competition Appeal Court.

There is a proposed Competition Amendment Act No. 1 of 2009, which extends liability specifically to a director of a "firm". The term "firm" includes a company. However, the Competition Amendment Act has not yet come into effect.

 
24. Briefly outline any other liability that directors can incur under other specific laws.

In terms of 45(6) of the Companies Act No. 71 of 2008, if a resolution or an agreement is void, a director of the company is liable to the extent set out in section 77(3)(e)(v) of the Companies Act No. 71 of 2008 if the director was present at the meeting when the board approved the resolution or agreement, or participated in the making of such a decision in terms of section 74 of the Companies Act No. 71 of 2008, and failed to vote against the resolution or agreement, despite knowing that the provision of financial assistance was inconsistent with section 45 of the Companies Act No. 71 of 2008.

 
25. Can a director's liability be restricted or limited? Is it possible for the company to indemnify a director against liabilities?

No provision of an agreement, the Memorandum of Incorporation (MOI), rules of a company or resolution adopted by a company, may relieve a director of (section 78(2), Companies Act No. 71 of 2008):

  • A duty contemplated in section 75 or 76 of the Companies Act No. 71 of 2008.

  • Liability contemplated in section 77 of the Companies Act No. 71 of 2008.

  • Negate, limit or restrict any legal consequences arising from an act or omission that constitutes wilful misconduct or wilful breach of trust on the part of the director.

A company cannot directly or indirectly pay any fine that can be imposed on a director of the company, or on a director of a related company, as a consequence of that director being convicted of an offence, unless the conviction was based on strict liability (section 78(3), Companies Act No. 71 of 2008).

Unless a company's MOI provides otherwise, the company can:

  • Advance expenses to a director to defend litigation in any proceedings arising out of the director's service to the company.

  • Directly or indirectly indemnify a director for expenses contemplated above, irrespective of whether it has advanced those expenses.

Expenses are covered if the proceedings are abandoned or exculpate the director or arise for any liability that the company can indemnify the director.

Except where the MOI of a company provides otherwise, a company can indemnify a director for any liability arising, other than liability arising:

  • Under section 77 (3)(a), (b) or (c) of the Companies Act No. 71 of 2008.

  • From wilful misconduct or wilful breach of trust on the part of the director.

 
26. Can a director obtain insurance against personal liability? If so, can the company pay the insurance premium?

A director can obtain insurance against personal liability. The insurance policy can cover just those matters that are statutorily permissible. This can include insurance for damages for an error, a negligent or misleading statement, or a breach of duty. It cannot protect against liability arising from a fraudulent, dishonest or illegal act or against wilful default or a wilful breach of a duty owed to the company.

Unless the Memorandum of Incorporation (MOI) of a company provides otherwise, a company can purchase insurance to protect a director against any liability or expenses that the company can indemnify a director against in accordance with section 78(5) of the Companies Act No. 71 of 2008 (section 78(7), Companies Act No. 71 of 2008).

 
27. Can a third party (such as a parent company or controlling shareholder) be liable as a de facto director (even though such person has not been formally appointed as a director)?

For the purposes of liability of directors in the Companies Act, "director" is defined as "including an alternate director, and a prescribed officer or a person who is a member of a committee of a board of a company, or of the audit committee of a company, irrespective of whether or not the person is also a member of the company's board." This definition is wide enough to include a de facto director.

Liability of directors is covered by section 77 of the Companies Act No 71 of 2008. A director of a company can also be held liable under the principles of common law relating to delict for any loss, damage or costs sustained by the company as a consequence of any breach by the director of:

  • A duty of care, skill and diligence.

  • Any provision of the Companies Act No. 71 of 2008.

  • Any provision of the company's Memorandum of Incorporation (MOI).

The liability of a director that fails to vote against a resolution approving prohibited distribution arises only if immediately after making all of the distribution, the company does not satisfy the solvency and liquidity test, and it was unreasonable at the time of the decision to conclude that the company would satisfy the solvency and liquidity test after making the relevant distribution. Proceedings to recover any loss, damages or costs for which a person is, or may be, held liable in terms of this provision cannot be commenced more than three years after the act or omission that gave rise to that liability.

In any proceedings against a director, other than for wilful misconduct or wilful breach of trust, the court may relieve the director, either wholly or partly, from any liability, on any terms the court considers just, if it appears to the court that the director is or may be liable, but has acted honestly and reasonably or that, having regard to all the circumstances of the case, including those connected with the appointment of the director, it would be fair to excuse the director.

 

Transactions with directors and conflicts

28. Are there general rules relating to conflicts of interest between a director and the company?

Directors must avoid conflicts of interest. Included in this duty is the no-profit rule and the corporate opportunity rule.

No-profit rule

Directors may not retain any profit made by them in their capacity as directors unless the majority of shareholders have agreed otherwise in a general meeting.

Corporate opportunity rule

A director is prohibited from usurping any contract, information or other opportunity that properly belongs to the company and that came to him as director of the company. A director's resignation does not divest him from the fiduciary duty not to usurp a corporate opportunity.

The common law duties of directors are the fiduciary duties of good faith, honesty and loyalty. At common law, directors cannot:

  • Exceed their powers.

  • Exercise their powers for an improper or collateral purpose.

  • Fetter their discretion.

  • Place themselves in a position in which their personal interests conflict or may possibly conflict, with their duties to the company.

Directors can neither divest themselves of, nor be exempted from, their fiduciary duties, though the court is explicitly given power in any proceedings against a director, other than for wilful misconduct or wilful breach of trust, to wholly or partially relieve the director from liability if certain prerequisites are satisfied. The directors' common law fiduciary duties do not replace duties that directors otherwise owe.

Directors owe their company a fiduciary duty not to enter into illegal transaction or act beyond its powers (ultra vires) or otherwise beyond its capacity or beyond any other limitation placed on its or their own powers by:

  • The Companies Act No. 71 of 2008.

  • The common law.

  • Their company's Memorandum of Incorporation (MOI).

A person having such powers must exercise it bona fide. Directors of a company are fiduciary agents, and a power conferred on them may not be exercised to obtain private advantage or for any other purpose foreign to the power. A director must act bona fide in the interests of the company as a whole. Their duty to act bona fide in the interests of the company as a whole means that directors are also under a fiduciary duty not to exercise their powers for unauthorised or collateral purposes.

Under the common law:

  • A director must exercise an independent and unfettered discretion.

  • A director may not place himself in a position where he has a personal interest or a duty that conflicts, or possibly may conflict, with his duties to the company.

  • A director may not act on behalf of his company in any matter where he has an interest that conflicts, or may possibly conflict, with his duties to the company.

  • A director must account to his company for all profits acquired by him from his position unless such profits were acquired or retained with the full knowledge and consent of the company. These profits include all profits acquired by a director during the course and execution of his office and all profits acquired by him by use of his office.

  • If a director, in the performance of his duties or functions, fails to display either the same care as a reasonable man would display in the conduct of his own affairs or that degree of skill that may reasonably be expected from a person of his knowledge and experience, he is liable to his company for any damage it may have suffered as a consequence. The standard is one of negligence, and not gross negligence. A director's potential liability at common law, in this regard, remains extant, notwithstanding the coming into force of the Companies Act No. 71 of 2008.

 
29. Are there restrictions on particular transactions between a company and its directors?

The provision of loans and other financial assistance to directors is regulated by section 45 of the Companies Act No. 71 of 2008. Except to the extent that the Memorandum of Incorporation (MOI) provides otherwise, the board of directors can authorise direct or indirect financial assistance to, amongst others, directors of the company or related or inter-related companies, if a special resolution of the shareholders approving such assistance was passed in the preceding two years (section 45(2), Companies Act No. 71 of 2008).

Written notice of such financial assistance must be provided to all shareholders. If the board of a company adopts a resolution to provide financial assistance, the company must provide written notice of that resolution to all shareholders, unless every shareholder is also a director of the company, and to any trade union representing its employees. Such notice must be given within:

  • Ten business days after the board adopts the resolution, if the total value of all loans, debts, obligations or assistance contemplated in that resolution, together with any previous such resolution during the financial year, exceeds one-tenth of 1% of the company's net worth at the time of the resolution.

  • 30 business days after the end of the financial year, in any other case.

 
30. Are there restrictions on the purchase or sale by a director of the shares and other securities of the company he is a director of?

The company's Memorandum of Incorporation (MOI) can prohibit certain purchases or sales of shares. Unless the MOI provides otherwise, the board can authorise that the company provide direct or indirect financial assistance to a director of the company, related or inter-related company or to a person related to any director (section 45, Companies Act No. 71 of 2008).

Despite any provision of a company's MOI to the contrary, the board may not authorise any financial assistance unless:

  • The particular provision of financial assistance is pursuant to a special resolution of the shareholders, adopted within the previous two years, which approved such assistance either for the specific recipient, or generally for a category of potential recipients, and the specific recipient falls within that category.

  • The board is satisfied that immediately after providing the financial assistance, the company would satisfy the solvency and liquidity test.

  • The terms under which the financial assistance is proposed to be given are fair and reasonable to the company.

A resolution by the board of a company to provide financial assistance is void to the extent that the provision of that assistance would be inconsistent with the Companies Act No. 71 of 2008.

 

Disclosure of information

31. Do directors have to disclose information about the company to shareholders, the public or regulatory bodies?

General

A director of a company must disclose an interest and its general nature before the matter is considered at a meeting of the board and must disclose to the meeting any material information relating to the matter and known to the director (section 75, Companies Act No. 71 of 2008), if either the director:

  • Has a personal financial interest in respect of a matter to be considered at a meeting of the board.

  • Knows that a related person has a personal financial interest in the matter,

Directors must disclose to the company all information that the company needs in order to comply with dealing in securities. Disclosure of all board practices is recommended in King Report on Governance for South Africa 2009, as read with the King Code of Governance for South Africa 2009 (collectively King III), specifically describing the:

  • Committee structures.

  • Duties.

  • Number of meetings.

  • Attendance at these meetings.

The Companies Act No. 71 of 2008 requires the audit committee to report to shareholders how it fulfilled its duties during the year.

JSE listed companies

A director acting within his duties requires him to be a representative of the company. Johannesburg Stock Exchange (JSE) listed companies must disclose the following information:

  • Compliance with corporate governance in their annual report.

  • Trading statements.

  • The declaration of dividends, interest and other similar payments.

  • Interim reports.

  • Provisional reports.

  • A notice of the annual general meeting.

  • The annual financial statements for the relevant financial year, which will have been reported on by the issuer's auditor.

  • The fact that stabilisation may take place.

  • Particulars of the securities issued or offered.

A company must disclose in its annual financial statements the following information concerning its securities held by the public:

  • The number of public securities holders for every class of listed securities.

  • The percentages of each class of securities held by public and non-public securities holders.

Companies applying to be listed as JSE Companies

If the applicant company's share capital consists of shares of par value, the following

information must be disclosed:

  • The authorised and issued, or agreed to be issued, share capital, detailing:

    • the different classes of shares;

    • the number of shares in each class;

    • the nominal value of each share in each class;

    • the number of securities held in treasury;

    • the total value of each class.

  • The share premium account.

If the applicant company's share capital consists of shares of no par value, the following information must be disclosed regarding the authorised and issued or agreed to be issued stated capital, detailing the:

  • Different classes of shares.

  • Number of shares in each class.

  • Number of securities held in treasury.

  • Total value of the stated capital account for each class.

Applicant companies must comply with corporate governance and must disclose their compliance therewith in their prelisting statement.

 

Shareholder rights

Company meetings

32. Does a company have to hold an annual shareholders' meeting? If so, when? What issues must be discussed and approved?

A distinction is drawn under the Companies Act No. 71 of 2008 between a shareholders' meeting and an annual general meeting of the shareholders (AGM). An AGM must be held once a year by a public company and particular items must be on the agenda (section 61, Companies Act No. 71 of 2008).

Under the Companies Act No. 71 of 2008, a shareholders' meeting is defined as "with respect to any particular matter concerning a company means a meeting of those holders of that company's issued securities who are entitled to exercise voting rights in relation to that matter". A company does not have to hold a shareholders' meeting annually.

 
33. What are the notice, quorum and voting requirements for holding meetings and passing resolutions?

A notice of the shareholders' meeting must be delivered at least fifteen business days before the meeting for a public company or a non-profit company that has voting members (section 62, Companies Act No. 71 of 2008). Otherwise the notice must be delivered at least ten business days before the meeting. The notice must be in writing and must contain certain information, including:

  • The date, time and place for the meeting.

  • The general or specific purpose of the meeting.

  • A copy of any proposed resolution that the company has received notice as well as a notice of the percentage of voting rights that would be required for that resolution to be adopted.

  • A reasonably prominent statement that a shareholder entitled to attend a vote at a meeting is entitled to appoint a proxy to vote, attend and participate in the meeting.

A company can make provision for a shareholders' meeting to be conducted by electronic communication. For public companies, every shareholders' meeting must be reasonably accessible within South Africa for electronic participation whether the meeting is held in South Africa or elsewhere (section 61, Companies Act No. 71 of 2008).

If voting is by show of hands, any person that is present at the meeting, whether as a shareholder or as proxy for a shareholder, can exercise voting rights and has one vote, irrespective of the number of voting rights that person would otherwise be entitled to exercise. If voting on a particular matter is to be performed by poll, any person present at the meeting (whether as a shareholder or as proxy for a shareholder) has the number of votes determined in line with the voting rights associated with the securities held by that shareholder. Despite any provision of a company's Memorandum of Incorporation (MOI) or agreement to the contrary, a polled vote must be held on any particular matter to be voted on at a meeting if a demand for such a vote is made by either:

  • At least five people with the right to vote on that matter, either as a shareholder or a proxy representing a shareholder.

  • A person that is, or persons who together are, able, as a shareholder or proxy representing a shareholder, to exercise at least 10% of the voting rights that are allowed to be voted on that matter.

A shareholders' meeting may not begin until sufficient persons are present at the meeting to exercise, in aggregate, at least 25% of all of the voting rights that are entitled to be exercised in respect of at least one matter to be decided at the meeting (section 62, Companies Act No. 71 of 2008). A company's MOI can specify a lower or higher percentage in place of the 25%. Despite the percentage figures set out in the Companies Act No. 71 of 2008 or in the provisions of a company's MOI, if a company has more than two shareholders, a meeting may not begin, or a matter begin to be debated, unless at least three shareholders are present at the meeting.

If within an hour after the appointed time for a meeting to begin, the requirements of the Companies Act No. 71 of 2008 for that meeting to begin have not been satisfied, the meeting is postponed without motion, vote or further notice, for one week. If the requirements of the Companies Act No. 71 of 2008 for consideration of a particular matter to begin have not been satisfied then if there is:

  • Other business on the agenda of the meeting, consideration of that matter can be postponed to a later time in the meeting without motion or vote.

  • If there is no other business on the agenda of the meeting, the meeting is adjourned for one week, without motion or vote. The person intended to preside at a meeting may extend the one-hour limit allowed for a reasonable period on the grounds that either:

    • exceptional circumstances affecting weather, transportation or electronic communication have generally impeded or are generally impeding the ability of shareholders to be present at the meeting;

    • one or more particular shareholders, having been delayed, have communicated an intention to attend the meeting, and those shareholders, together with others in attendance, would satisfy the requirements of quorum.

A company's MOI or rules can specify a different time in substitution for the two periods of one hour or one week. A company does not have to give further notice of a meeting that is postponed or adjourned unless the location for the meeting is different.

Every resolution of shareholders is either an ordinary resolution or a special resolution (section 65, Companies Act No 71 of 2008). The board can propose any resolution to be considered by the shareholders, and can determine whether that resolution will be considered at a meeting, by vote or by written consent. Any two shareholders of a company can propose a resolution concerning any matter where they are each entitled to exercise voting rights. When proposing a resolution, they can require that the resolution be submitted to shareholders for consideration.

For an ordinary resolution to be approved by shareholders, it must be supported by more than 50% of the voting rights exercised on the resolution. Except for an ordinary resolution for the removal of a director, a company's MOI can require:

  • A higher percentage of voting rights to approve an ordinary resolution.

  • One or more higher percentages of voting rights to approve ordinary resolutions concerning one or more particular matters,

For the above to occur there must at all times be a margin of at least 10% of points between the highest established requirement for approval of an ordinary resolution on any matter and the lowest established requirement for approval of a special resolution, on any matter.

For a special resolution to be approved by shareholders, it must be supported by at least 75% of the voting rights exercised on the resolution. A company's MOI can permit:

  • A different percentage of voting rights to approve any special resolution.

  • One or more different percentages of voting rights to approve special resolutions concerning one or more particular matters, respectively, provided that there is always a margin of at least 10% of points between the highest established requirement for approval of an ordinary resolution on any matter, and the lowest established requirement for approval of a special resolution, on any matter.

Shareholders can consent in writing to decisions that could be voted on at shareholders' meetings (section 60, Companies Act No. 71 of 2008). The Companies Act No. 71 of 2008 allows for this and therefore provides companies with a quick and efficient means of passing resolutions.

 
34. Are specific voting majorities required by statute for certain corporate actions?

Special resolutions of the shareholders are required to:

  • Amend the company's Memorandum of Incorporation (MOI) (section 16(1)(c) and section 36(2)(a), Companies Act No. 71 of 2008).

  • Ratify a consolidated revision of a company's MOI (section 18(1)(b), Companies Act No. 71 of 2008).

  • Ratify actions by the company or directors in excess of their authority (section 20(2), Companies Act No. 71 of 2008).

  • Approve an issue of shares or grant of rights (section 41(1), Companies Act No. 71 of 2008).

  • Approve an issue of shares or securities (section 41(3), Companies Act No. 71 of 2008).

  • Authorise the board to grant financial assistance (section 44(3)(a)(ii) or 45(3)(a)(ii), Companies Act No. 71 of 2008).

  • Approve a decision of the board for re-acquisition of shares (section 48(8), Companies Act No. 71 of 2008).

  • Authorise the basis for compensation to directors of a profit company (section 66(9), Companies Act No. 71 of 2008).

  • Approve the voluntary winding up of the company (section 80(1), Companies Act No. 71 of 2008).

  • Approve the winding up a company in the circumstances (section 81(1), Companies Act No. 71 of 2008).

  • Approve an application to transfer the registration of the company to a foreign jurisdiction (section 82(5), Companies Act No. 71 of 2008).

  • Approve any proposed fundamental transaction, to the extent required by Part A of Chapter 5 of the Companies Act No. 71 of 2008.

  • Revoke a resolution (section 164(9)(c), Companies Act No. 71 of 2008).

A company's MOI can require a special resolution to approve any other matter not contemplated above.

 
35. Can shareholders call a meeting or propose a specific resolution for a meeting? If so, what level of shareholding is required to do this?

The board of directors, or any other person specified in the company's MOI or rules, must call a shareholders meeting if one or more written and signed demands for such a meeting are delivered to the company. Such a demand must describe the specific purpose of which the meeting and must be proposed by at least 10% of the voting rights entitled to be exercised in relation to the matter proposed to be considered at the meeting.

Minority shareholder action

36. What action, if any, can a minority shareholder take if it believes the company is being mismanaged and what level of shareholding is required to do this?

A minority shareholder can:

  • Apply to a court for an order declaring a person delinquent or under probation (section 162, Companies Act No. 71 of 2008).

  • Apply to a court for relief if (section 163, Companies Act No. 71 of 2008):

    • any act or omission of the company or the business of the company, has had a result that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of the applicant;

    • the business of the company, or a related person, is being or has been carried on or conducted in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of the applicant;

    • the powers of a director or prescribed officer of the company, or a person related to the company, are being, or have been, exercised in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of the applicant.

  • Serve a demand on a company to commence or continue legal proceedings or take related steps to protect the legal interests of the company (section 16, Companies Act No. 71 of 2008).

A company must give notice to shareholders of a meeting that will consider either (section 164, Companies Act No. 71 of 2008):

  • Adopting a resolution to amend its Memorandum of Incorporation (MOI) by materially altering any class of its shares adverse to the rights or interests of holders of that class of shares.

  • Entering into a transaction contemplated in section 112, 113, or 114 of the Companies Act No. 71 of 2008.

At any time before such a resolution is voted on, a dissenting shareholder can give the company written notice objecting to the resolution. A shareholder can demand that the company pay the shareholder the fair value for all of the shares of the company held by that person subject to certain requirements.

A holder of issued securities of a company can apply to a court for an order determining any rights for that type of security under:

  • The Companies Act No. 71 of 2008.

  • The company's MOI.

  • Any rules of the company.

  • Any applicable debt instrument.

The right to apply to a court is in addition to any other remedy available to a holder of a company's securities under the Companies Act No. 71 of 2008.

Shareholders have a statutory right to prevent the company from violating any provision of the Companies Act No. 71 of 2008 and from an ultra vires action or transaction.

 

Internal controls, accounts and audit

37. Are there any formal requirements or guidelines relating to the internal control of business risks?

Under the King Report on Governance for South Africa 2009, as read with the King Code of Governance for South Africa 2009 (collectively King III), the board of directors is responsible for the governance of risk and determining the levels of risk tolerance that the company can bear in the following its objectives. The board must determine the levels of risk tolerance at least once a year. The board's responsibility should manifest in a documented risk management policy expressed in the board's charter. A risk or audit committee should assist the board in carrying out its responsibilities. The King III recommends that the board should ensure that there are processes in place that enable complete, timely, relevant, accurate and accessible risk disclosure to stakeholders.

 
38. What are the responsibilities and potential liabilities of directors in relation to the company's accounts?

The directors of the company are ultimately responsible for the preparation of financial statements. They can delegate this task but may not abdicate responsibility for it.

 
39. Do a company's accounts have to be audited?

Public/state-owned companies

Every public and state-owned company must have their accounts audited except to the extent that the company is exempt from the application of this chapter, in terms of section 9(3) of the Companies Act No. 71 of 2008 and is subject to section 84(3) of the Companies Act No. 71 of 2008 (section 246, Companies Act No. 71 of 2008).

Private/personal liability/non-profit companies

Private, personal liability and non-profit companies do not have to have their accounts audited unless their Memorandum of Incorporation (MOI) requires it or it is required by the Companies Act No. 71 of 2008 following certain ministerial regulations.

Notwithstanding this, current regulations state that any company that falls within any of the following categories in any particular financial year must have its annual financial statements for that financial year audited:

  • Any profit or non-profit company if, in the ordinary course of its primary activities, it holds assets in a fiduciary capacity for persons that are not related to the company and the aggregate value of such assets held at any time during the financial year exceeds R5 million.

  • Any non-profit company, if it was incorporated either:

    • directly or indirectly by the state, an organ of state, a state-owned company, an international entity, a foreign state entity or a foreign company;

    • primarily to perform a statutory or regulatory function in terms of any legislation or to carry out a public function at the direct or indirect initiation or direction of an organ of the state, a state-owned company, an international entity, or a foreign state entity, or for a purpose ancillary to any such function.

  • Any other company whose public interest score in that financial year is either:

    • 350 or more;

    • at least 100, if its annual financial statements for that year were internally compiled.

 
40. How are the company's auditors appointed? Is there a limit on the length of their appointment?

Public/state owned companies

Every public or state-owned company must appoint an auditor on incorporation and each year at its annual general meeting (section 90(1), Companies Act No. 71 of 2008).

Private/ personal liability/ non-profit companies

Companies required by the Companies Act No. 71 of 2008 or the regulations to have its annual financial statements audited every year or where their Memorandum of Incorporation (MOI) requires it, must appoint an auditor on incorporation and each year at its annual general meeting.

To be appointed as an auditor of a company, a person or firm must be a registered auditor and must be acceptable to the company's audit committee as being independent of the company. No individual can serve as auditor or designated auditor of a company for more than five consecutive financial years. If an individual has served as an auditor for two or more consecutive financial years and then ceases to be an auditor or designated auditor, that individual may not be appointed again as the auditor or designated auditor of that company until the expiry of at least two further financial years.

 
41. Are there restrictions on who can be the company's auditors?

To be appointed as an auditor of a company, a person or firm must be a registered auditor and must be acceptable to the company's audit committee as being independent of the company. The person, firm or related person must not be, or have been at any time in the past five years immediately preceding the date of appointment:

  • A director or prescribed officer of the company.

  • An employee or consultant of the company that was or has been engaged for more than one year in the maintenance of any of the company's financial records or the preparation of any of its financial statements.

  • A director, officer or employee of a person appointed as company secretary.

  • A person that, on their own or with a partner or employees, habitually or regularly performs the duties of accountant or bookkeeper, or performs related secretarial work, for the company.

  • Disqualified to serve as a director (section 69(8), Companies Act No. 71 of 2008).

 
42. Are there restrictions on non-audit work that auditors can do for the company that they audit accounts for?

An auditor appointed by a company may not perform any services for that company that would place the auditor in a conflict of interest as prescribed or determined by the Independent Regulatory Board for Auditors under section 44(6) of the Auditing Profession Act No. 26 of 2005, or as determined by the company's audit committee. The audit committee can in turn determine the non-audit services of the auditors.

 
43. What is the potential liability of auditors to the company, its shareholders and third parties if the audited accounts are inaccurate? Can their liability be limited or excluded?

The auditor can incur civil and criminal liability and can be subject to disciplinary measures by the Independent Regulatory Board for Auditors for inaccuracies in the audited accounts.

An auditor can incur criminal liability for:

  • Failing to report a reportable irregularity in accordance with the Auditing Profession Act No. 26 of 2005.

  • Knowingly making a materially false statement in any document required by the Companies Act No. 71 of 2008.

  • Concealing, destroying or falsifying any company document or, with intent to defraud, erasing all or part of a company document.

  • Contravening the Auditing Profession Act No. 26 of 2005.

Auditors do not have a contractual or fiduciary relationship with third parties. Consequently, auditors are potentially liable to third parties on the basis of the general principles of common law delictual liability (tort). An auditor is not liable to a third party for any document produced by him if he acts in good faith even if the information produced relates to confidential information about his clients.

With any opinion expressed or report or statement made by a registered auditor in the ordinary course of duties, the registered auditor does not incur any liability to a client or any third party, unless it is proved that the opinion was expressed, or the report or statement made:

  • Maliciously.

  • Fraudulently.

  • Pursuant to a negligent performance of the registered auditor's duties.

However, a registered auditor, can incur liability to third parties who have relied on an opinion, report or statement of that registered auditor for financial loss suffered as a result of having relied on it, only if it is proved that the opinion was expressed, or the report or statement was made pursuant to a negligent performance of the registered auditor's duties and the registered auditor knew, or could of reasonably foreseen, that the document would be used or relied on by a third party.

A registered auditor can incur additional or other liability, other than the above, arising from a contract between a third party and the registered auditor or any other statutory provision or the common law. A registered auditor can incur liability to any partner, member, shareholder, creditor or investor of an entity if the registered auditor fails to report a reportable irregularity. A registered auditor may not through an agreement or in any other way limit or reduce the liability that such an auditor can incur.

 
44. What is the role of the company secretary (or equivalent) in corporate governance?

A public or state-owned company must appointment a company secretary (section 86, Companies Act No. 71 of 2008). Under the King Report on Governance for South Africa 2009, as read with the King Code of Governance for South Africa 2009 (collectively King III), a company's secretary is accountable to the company's board. The role of the company secretary is to:

  • Provide advice to the board on matters of ethics and good governance.

  • Assist with the proper and timely compilation of board agendas.

  • Ensure that the procedures for the appointment of directors are followed and that induction, orientation and development courses take place.

  • Assist the board with the annual evaluation of the board, its individual directors and senior management.

A company secretary's duties also include, but are not restricted to (section 88, Companies Act No. 71 of 2008):

  • Providing the directors of the company collectively and individually with guidance as to their duties, responsibilities and powers.

  • Making the directors aware of any law relevant to or affecting the company.

  • Reporting to the company's board any failure on the part of the company or a director to comply with the Memorandum of Incorporation (MOI), rules of the company or the Companies Act No. 71 of 2008.

  • Ensuring that minutes of all shareholders meetings, board meetings and the meetings of any committees of the directors, or of the company's audit committee, are properly recorded in accordance with the Companies Act No. 71 of 2008.

  • Certifying in the company's annual financial statements whether the company has filed required returns and notices in terms of the Companies Act No. 71 of 2008 and whether all such returns and notices appear to be true, correct and up to date.

  • Ensuring that a copy of the company's annual financial statements is sent, in accordance with the Companies Act No. 71 of 2008 to every person that is entitled to it.

 

Online resources

Department of Justice and Constitutional Development

W www.justice.gov.za

Description: Department of Justice and Constitutional Development (official). Translations are for guidance only and the English-language version is binding.



Contributor profile

Morné van der Merwe

Baker & McKenzie

T +27 11 911 4305
F +27 11 784 2855
E Morné.vanderMerwe@bakermckenzie.com
W www.bakermckenzie.com

Professional qualifications. South Africa, Attorney, 1995; L.L.M, Stellenbosch University, 1993; B.A, Stellenbosch University, 1991

Areas of practice. Mergers and acquisitions (public and private); mining law; securities law; joint ventures; black economic empowerment transactions; capital markets; corporate finance and structuring; leveraged and management buy-outs; private equity transactions

Languages. English, Afrikaans

Professional associations/memberships. Law Society of Northern Provinces.


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