South Africa: Companies Act 2008: Provisions Affecting Directors

Originally Published 21^st April 2009

The new Companies Act (Number 71 of 2008) (the Act) was signed by the President on 8 April 2009. It is set to replace the existing Companies Act of 1973 and is therefore the first substantial change to this important area of the law in more than three decades.

The Act will, inter alia, introduce a number of important provisions relating to directors and in this note we discuss some of the more significant of those provisions.

In terms of the Act the board of directors of a private company or a personal liability company must have at least one director and the board of a public company and non-profit companies must have at least three directors.

The provisions of the Act relating to directors' personal financial interests in matters being considered by the board have been revised. If a director has a personal financial interest in respect of a matter to be considered at a meeting of the board, or if the director knows that a related person has a personal financial interest in the matter, the director must disclose the nature of that interest and any material information relating to the matter before it is considered at the meeting. The director must then leave the meeting and may not take part in the decision making in respect of the matter.

The Act introduces a number of provisions relating to the standards of conduct of directors. These include a partial codification of the common law duties of directors. This means that the Act will not replace the common law duties of directors that are not expressly amended or are not in conflict with the Act. It is important to note that the standards of conduct set out in the Act are applicable not only to directors, but also to officers of the company and members of the audit committee and board committees.

Important duties placed on directors by the Act are that

• directors may not use their position or company information to (i) gain an advantage other than for the company or (ii) knowingly cause harm to the company;

• directors must communicate to the board any information in relation to the company that comes to the director's attention, subject to certain exceptions.

Directors must also exercise the powers and perform the functions of director:

• in good faith and for a proper purpose;

• in the best interest of the company; and

• with the degree of care, skill and diligence that may reasonably be expected of a person (i) carrying out the same functions as those carried out by that director and (ii) having the general knowledge, skill and experience of that director.

The Act introduces the American doctrine known as the "Business Judgment Rule" into South African law. This rule was developed alongside the duty of care and skill in the United States of America as far back as 1829, in terms of which directors could be excused from liability under certain circumstances. The Act provides in this regard that a director will have satisfied his or her duties in regard to the matter at hand if he or she took reasonably diligent steps to become informed about the matter, has no material financial interest in the matter or had properly disclosed such interest, and made a decision rationally in the belief that it was in the best interests of the company.

Our courts will no doubt be called upon in future to interpret the requirements of the business judgment rule as it has been framed in the Act, but directors are well advised to inform themselves adequately regarding all matters on which they are called to make decisions, to disclose any financial interest they have in any company matters and to ensure that they act in the company's best interests. The business judgment rule is good news for directors since it is likely that it will act as a countermeasure to excessive director liability.

It is however important to note that directors may incur criminal or civil liability in the event of a breach of certain duties as specified in the Act.

Finally, it should be noted that the Act introduces an interesting new regime in terms of which directors may be (i) declared delinquent or (ii) placed on probation as a result of certain conduct. This entails an application to made to court by the company, a director, a shareholder, the company secretary, a registered trade union or representatives of employees of the company. The grounds for the application for delinquency and probation are set out in the Act, but by way of example, a director could be:

• declared a delinquent if he/she grossly abused his/her position or if he/she caused intentional harm to the company; and

• placed on probation if the director improperly supported a resolution contrary to the solvency and liquidity test or otherwise acted in a manner which is inconsistent with the duties of directors.

The new Act will take effect on a date to be determined by the President, which is currently anticipated to be 1 July 2010

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.