Part 1 of a legal analysis of the COVID-19 outbreak. In this article we look at ways in which companies and their directors and employees can still meet their obligations in terms of the Companies Act and the King IV Report on Corporate Governance for South Africa, and minimise disruptions resulting from the COVID-19 pandemic.
The World Health Organisation has declared coronavirus disease (COVID-19) a global pandemic. The Minister of Cooperative Governance and Traditional Affairs has, in terms of the Disaster Management Act of 2002, and acting on the advice of the National Disaster Management Centre, declared COVID-19 outbreak a national state of disaster. This will enable government to create an integrated and coordinated disaster management mechanism that will focus on preventing and limiting the spread of the virus.
Flowing from the Minister's declaration, the President announced that government had decided to take urgent and drastic measures to manage the disease, protect the people of South Africa and reduce the impact of the virus on the South African society and economy. To this end the Government intends to set up emergency, rapid and effective response systems. Pursuant to this announcement, the Minister of Cooperative Governance and Traditional Affairs published Regulations on 19 March 2020 "regarding the steps necessary to prevent an escalation of the disaster or to alleviate, contain and minimise the effects of the disaster".
The measures instituted include limiting contact between persons who may be infected and other South African residents. A travel ban has also been imposed on foreign nationals from high-risk countries such as Italy, Iran, South Korea, Spain, Germany, the United States, the United Kingdom and China as from 18 March 2020. Visas to visitors from these countries have been cancelled or revoked. South African citizens are advised to refrain from all forms of travel to or through the European Union, United States, United Kingdom and other identified high-risk countries such as China, Iran and South Korea. Gatherings of more than 100 people will be prohibited. Mass celebrations of upcoming national days and other large government events will be cancelled. Where small gatherings are unavoidable, organisers will need to put in place stringent measures for prevention and control. Businesses and venues that are often frequented by many people have been encouraged to ensure that they take all necessary measures to intensify hygiene standards.
The measures announced by the President, especially those that curb personal contact and gatherings of persons at any place, will inevitably present challenges to the functioning and management of companies. In this article, we look at ways in which companies and their directors and employees can still meet their obligations in terms of the Companies Act, 71 of 2008, and the King IV Report on Corporate Governance for South Africa, 2016 ("King IV"), and minimise disruptions resulting from the pandemic.
In terms of section 66(1) of the Companies Act, "The business and affairs of a company must be managed by or under the direction of its board, which has the authority to exercise all of the powers and perform any of the functions of the company, except to the extent that [the] Act or the company's Memorandum of Incorporation provides otherwise". King IV obliges the board to "serve as the focal point and custodian of corporate governance in the organisation".
As far as shareholders are concerned, it is not envisaged that they play an active role in the management of the company. They do, however, have a right to vote on certain fundamental decisions of the company that might affect their investments, such as the disposal of major assets, the issuing of new shares and the winding up of the company. They also have the right to hold the directors accountable for their performance, and if they deem it appropriate, to remove and replace directors.
The Companies Act, and indeed time-honoured business practice, contemplates that both the board and the shareholders will exercise their rights, and carry out their duties, through decisions made after collective discussion in meetings. One of the principle effects of the COVID-19 pandemic and the restrictions placed on both travel and gatherings, is that it will often not be possible for all the directors or all the shareholders, as the case may be, to gather under one roof. It may even become impossible to get the required quorum together to vote on important issues. The company will need to make other arrangements for the directors or shareholders to discuss and vote on the issues. In doing so, it must still comply with the requirements of the Companies Act, to ensure that the resolutions taken are valid and not open to technical challenges.
The board of a company or any other person specified in the company's Memorandum of Incorporation ("MOI") may call a shareholders' meeting at any time. A company must call a shareholders' meeting when it is necessary to fill a vacancy on the board or when requisitioned by members holding at least 10% of the shareholders' voting rights. A public company is required to convene an annual general meeting of its shareholders once a year. The board of the company may determine the location for the shareholders' meeting. The meeting may be held in the Republic of South Africa or in any other country.
The quorum required by the Companies Act for a shareholders' meeting is shareholders holding at least 25% of the voting rights of all shareholders, or at least three shareholders if the company has three or more.
The Companies Act provides various solutions, to which a company may resort if it is not possible to hold face to face meetings or to obtain a quorum:
- The Act allows any shareholder to be represented by proxy at a meeting if they are not able to attend in person.
- It permits a meeting to be conducted entirely by electronic communication, or for some shareholders or proxies for shareholders to participate by electronic communication in a meeting. A public company is obliged to provide for this. The means of electronic communication used must allow all persons participating in that meeting to communicate concurrently and effectively with each other without an intermediary and the notice must inform shareholders of the electronic form of participation and how to access it.
- A shareholders' resolution may be passed without the need for a meeting at all. The resolution may instead be submitted for consideration to the shareholders and voted on in writing. The resolution will have been adopted if it is supported by shareholders entitled to exercise sufficient voting rights for it to have been adopted as an ordinary or special resolution, as the case may be, at a properly constituted shareholders meeting and will have the same effect as if it had been approved by voting at a meeting.
A board meeting may be conducted by electronic communication unless the company's MOI prohibits it. As in the case of a shareholders' meeting, directors may participate in a meeting by electronic communication, so long as the electronic communication facility enables all participants to communicate concurrently with each other without an intermediary and to participate effectively in the meeting.
Directors acting other than at meeting
Unless the MOI of the company provides otherwise, a decision that could be voted on at a board meeting may be adopted by a decision of the majority of the board, given by electronic communication, provided that each director has received notice of the matter to be decided.
Like everyone in the rapidly changing situation in which we all find ourselves, companies whose management and governance may be affected by the pandemic and the restrictions that have necessarily followed it must consider all the alternatives. Careful consideration of all the legal and practical implications, with the necessary professional input, is essential.
The second article in this series discusses the legal issues faced by businesses as result of possible supply chain disruptions, which you can read here.
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.