A perennial issue for multinational corporations with subsidiary
companies in South Africa is whether to apply the Corporate
Governance policies and rules of the group to the South African
subsidiary or whether King III, South Africa's corporate
governance code and report applies to such subsidiaries.
Note 142 of the King III Report states that "the
holding company must recognise the fiduciary duties of the
subsidiary company's directors and particularly their duty to
act in the best interest of the subsidiary company at all times
whether or not the director is nominated to the board of the
subsidiary company by the holding company. In the case of the
conflict between the duties of nominee director to a company on
whose board he sits and in the interests of his principal, the
duties of the director to the company of which he is a director
must prevail." This has relevance not only to the
question which we are discussing in this article but also to the
provisions of such director's contract both as an employee and
a director (whether executive or non-executive) of the subsidiary
Principle 2.24 of the King III Report (in Chapter 2) provides
that a governance framework should be agreed between the group and
its subsidiary boards and it follows that subsidiaries do not
automatically assume the policies of the holding company –
even if it is a wholly owned subsidiary. The board of the
subsidiary company thus needs to apply its mind to the adoption of
all policies, based on what it deems to be in the best interest of
the subsidiary company. Not only is this in alignment with the
recommendations of the King III Report but is also supported by the
statutory and fiduciary duties of directors to act in the best
interest of the company.
Note 146 of the King III Report makes it clear that where the
holding company is not South African, but the subsidiary is a South
African company, then the South African Subsidiary should apply the
principles of King III.
It frequently happens that holding companies require their
subsidiary in South Africa to follow the holding company's (or
group's) corporate governance policies and rules but such an
approach would not be consistent with the recommendations of King
III which apply to all South African companies on an "apply or
explain" basis. A non-application of any of the King III
recommendations could thus be explained by the subsidiary company
but only after the board of the subsidiary had in fact applied its
mind to the matter.
The failure to apply the King III recommendations by a
subsidiary of an American – listed holding company would have
implications under and in terms of Sarbanes Oxley as the listed
entity in the US would be obliged to notify the authorities and its
stakeholders of its non- application of the King III
recommendations by its South African subsidiary.
The solution, it is respectfully submitted, is for such
subsidiaries to adhere to the King III Report and Code on an
"apply or explain basis" (which is in any event
the way the Code and Report are to be interpreted) and to have as a
policy any additional rules and regulations which the holding
company or the group impose which are not addressed in King
It is important to note that what is set out above applies not
only to a subsidiary of a foreign company but also to the formal
operations in South Africa of external or foreign companies (which
are entities incorporated outside South Africa), irrespective of
whether it is a profit or non-profit entity. The aforementioned are
sometimes referred to as a branch or external company.
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.
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