1 June 2009

Directors' duties and board governance

The most important provisions in the new Act from a corporate or board governance perspective, are those creating a new dispensation of statutory duties for directors. Section 76 (under the heading "Standards of directors conduct") creates a dispensation of statutory fiduciary duties for directors (to act in good faith for a proper purpose and in the best interest of the company) and the duty of reasonable care (to act with the degree of care, skill and diligence of a director that may reasonably be expected of a person, measured both objectively and subjectively).

The statutory duties can be described as an attempt to partly codify the well-known common law duties of directors and brings our company law in line with other jurisdictions (for example Chapter 2D of the Australian Corporations Act 2001).

An important and unique difference from other jurisdictions contained in the new Act is, however, a positive duty found in section 76(2) that a director must disclose any material information (not only confidential information) to the board. This obligation can be seen as more onerous than the common law duties.

The question arises, if the new statutory duties are in general more onerous than the common law duties?

The most important consideration in responding to this question is that section 76(4) contains a very helpful defence for a director to alleviate any of these perceived more onerous duties. This provision is substantially similar to section 180 (2) of the Australian Corporation Act 2001 - the so-called "business judgment rule".

The rule consists of both an objective and subjective element. A director will have fulfilled these duties if the director has:

  • taken "reasonably diligent steps to become informed of the matter";
  • had "no material personal interest" in the subject matter (or has complied with the disclosure requirements as contemplated in section 75); and
  • had "a rational basis for believing and did believe" that the decision is in the best interest of the company.

A director is further entitled to rely on the performance of and information supplied by third parties when making such decisions, which include for example any delegated person, competent employees, professional advisors and board committees.

The statutory duties of directors are supplemented by new provisions addressing conflicts of interest in section 75. This section contains a fairly comprehensive procedure to be followed by a director to disclose any personal financial interest, or if the director knows that a related person has a personal financial interest. These procedures and obligations are more onerous than the current provisions in the Companies Act of 1973.

Section 77(2) deals in a consolidated and concentrated way with the liability of a director who breaches these duties. When a fiduciary duty is breached, the principles of the common law will apply. Where the duty of reasonable care is breached, a director will be held liable in accordance with the principles of the common law relating to delict for any loss that the company may suffer.

A director can further in terms of section 162(5)(c) be declared by a court to be a delinquent director. This procedure is available to the company, a shareholder, director, company secretary or prescribed officer, a registered trade union or another representative of the employees of a company. A declaration for delinquency may in terms of section 162 (6) be made subject to any conditions the court considers appropriate and subsists for seven years or longer.

An important provision from a board structure perspective is section 72, which specifically entitles a board to appoint board committees.

The only prescribed committee (for a public company, state-owned company or company that voluntarily chooses to do so) will be an audit committee.

An interesting new provision is that of section 72(4) that will require the implementation of a social and ethics committee, which will be compulsory for companies as prescribed by the Minister. The powers and objective of this proposed committee is unclear at this stage.

The new Act further contains provisions which aim to promote transparency and accountability. A summary of some of these provisions is:

  • flexibility in the manner and form of shareholders meetings, the exercise of proxy rights and the standards for the adoption of ordinary and special resolutions;
  • retaining the existing qualifications for directors with enhanced flexibility for very small companies with a single shareholder or director;
  • recognition of alternate directors, directors who may be appointed by designated persons and ex officio directors; and
  • the introduction of a more certain and nuanced scheme for the removal of directors - section 71 provides that both shareholders and directors are entitled to remove a director.

These provisions should all be welcomed and will in due course be enhanced by possible additional corporate governance guidelines to be contained in the King III Report, which was published for comment in early 2009. The statutory duties of the new Act of directors are certainly one of the more controversial parts of the new Act and their practical implementation and their effect will most certainly be lively debated.

Johan Coetzee
Director, Corporate and Commercial

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