15 October 2010

The latest high-risk occupation - to be or not be a director under the new Companies Act

In terms of the new Act, and contrary to the position under the current Act, the management of the business and affairs of a company is placed specifically within the directors' domain. Accordingly, directors have broad powers in relation to the management of the company, the exercise of which are circumscribed only to the extent as may be set out in the company's Memorandum of Incorporation.

But as the contemporary proverb dictates, "with great power comes great responsibility." The new Act codifies directors' common law fiduciary duties in setting out specific standards of conduct for directors, although it is notable that the new Act does not provide a complete codification of such common law duties, and it is generally accepted that the list as adopted in the new Act is not a numerus clausus. Thus, all the current fiduciary duties of directors remain relevant and applicable.

Specific directors' duties

Under the new Act a director is obliged to disclose any personal financial interest of any monetary or economic value, in any matter, as well as any material information in relation to such matter, to the board of directors of the company before the board considers the matter. The director must then recuse himself and may not participate in the discussion or vote.

Directors are prohibited from using their position to gain any advantage for themselves or any other person other than the company and must communicate any relevant information in relation to the company of which they may become aware, to the board of directors.

The new Act further codifies the common law fiduciary duty of exercising due "care and skill." It is specifically provided that directors must exercise their powers:

  • in good faith and for a proper purpose;
  • in the best interests of the company; and
  • with the degree of care, skill and diligence that may be reasonably expected of a person in their position and having their general degree of knowledge and experience.

It is also accepted as common law, that directors may rely on outside information and advice in decision making relating to the affairs of the company. In this regard, the new Act codifies a statutory business judgement rule, allowing directors to take advice from third parties both in and outside of the company to inform their decisions as directors, provided they regard those persons as being reliable.

Liability of directors

In addition to setting out the particular duties of directors, the new Act further provides for an extensive list of instances where directors may be held personally liable should their actions or omissions result in a company suffering any loss or damage.

From a more general perspective, the new Act provides that "any person who contravenes any provision of [the new Act] is liable to any other person for any loss or damage suffered by that person as a result of that contravention." Therefore directors would be liable to any third parties, including creditors and individual shareholders, for losses or damages arising from their breach of any of the provisions under the new Act.

It is notable that a company and its directors may not avoid any of the duties or liabilities imposed in the new Act via resolution or in terms of its Memorandum of Incorporation, or its rules.

It is certainly arguable that the provisions of the new Act set more rigorous standards for directors of companies than what prevails under the current Act. Persons consenting to be directors should familiarise themselves with their obligations under the new Act, as well as all their common law fiduciary duties. In addition, directors should avail themselves to the opportunity to take professional advice and guidance from legal counsel, accountants and other qualified persons in informing their decisions in relation to the business and affairs of the company.

Aneeka Savahl, Senior Associate
Corporate and Commercial

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