Company Directors: Some Aspects Explained

With the focus on the South African Companies Act

Different types of directors

What is a company director?

Simply put, a director of a company is an elected or appointed person, who as a member of a board of directors, has the responsibility to determine and implement the company’s corporate policy, governing the company along with other directors.

The Cambridge Dictionary defines a director of a company as ‘one of the groups of managers at the highest level in a company who control it and are in charge of making decisions about how it is run.’

The Oxford Dictionary has a more concise description of a company director, namely: ‘One of a group of senior managers who run a company.’

The South African Companies Act (Act 71 of 2008), hereafter referred to as the Act, defines a company director as follows: ‘A member of the board of a company [1]…, or an alternate director of a company and includes any person occupying the position of a director or alternate director, by whatever name designated.’

What is an ‘alternate director’?

Section 1 of the Act describes an alternate director as ‘a person elected or appointed to serve, as the occasion requires, as a member of the board of a company in substitution for a particular or appointed director of that company.’

What is a ‘de facto director’?

A ‘de facto director’ is an individual who has not been formally elected or appointed to a board of directors but who fulfils the role of a director.

The wording, ‘any person occupying the position of a director or alternate director, by whatever name designated,’ in the definition of the Act indicates that the regulations of the Act are not only applicable to members of the board of a company, but also to ‘de facto directors.’

What is an ‘ex officio director?

The Companies Act of South Africa defines an ex officio director as ‘a person who holds office as director of a particular company solely as a consequence of that person holding some other office, title, designation, or similar status specified in the company’s Memorandum of Incorporation.’

What is an executive director?

An executive director is appointed by the board of directors, leading the company and board of directors to fulfil the mission and goals of the company.

In addition, executive directors must create and improve the culture of the company, motivate other directors and employees, oversee the company’s budget, and seek opportunities to grow the company.

What is a non-executive director?

A non-executive director is a type of director that is not involved in the day-to-day management of the company. Non-executive directors fulfil an independent role, providing objective judgement and advice with regard to issues such as performance, transformation, strategy, sustainability, and standards of conduct.

What is a delinquent director?

A delinquent director is a person who has been found guilty of serious misconduct and gross abuse during his/her time as a director.

Section 162 of the Act describes the process to declare a director delinquent. Section 162 (5) mentions the following reasons why a director can be declared a delinquent director:

• grossly abused the position of director,
• took personal advantage of information or an opportunity,
• intentionally, or by gross negligence, afflicted harm upon the company or a subsidiary of the company,
• acted in a manner ‘that amounted to gross negligence, wilful misconduct or breach of trust in relation to the performance of the director’s functions within, and duties to, the company.’

A delinquency order will ban an individual from being a director for at least 7 years, or such a long period as determined by the court, or even for a lifetime in extremely serious cases.

What is a board of directors?

A board of directors also referred to as the board of directors of a company, is a company’s governing body, an elected group of individuals that represent the shareholders of a company.

The Act uses mostly the term ‘the board of a company’ when it refers to the board of directors.

The South African Companies Act and company directors

This article focuses mainly on information, regulations, and prescriptions concerning company directors as described in the South African Companies Act, endorsing one of the purposes in the Act, namely: ‘… to balance the rights and obligations of shareholders and directors within companies.’ (Section 7 (i))

Election and appointment of directors

Number of directors

Section 66 (2) of the Act regulates that the board of a company must include a minimum of the following number of directors:

• private company[2]: one director
• personal liability company[3]: one director
• public company[4]: three directors
• non-profit company[5]: three directors

First directors

Section 67 (1) states that each incorporator of a company will also be the first director of the company. This arrangement will continue until a sufficient number of other directors have been:

• first appointed in terms of section 66 (4) of the Act, in which it is indicated that a company’s Memorandum of Incorporation allows for the appointment of a certain number of directors, or
• first elected in agreement with the provisions set out in section 68, requiring that each director must be voted on by a separate resolution by the shareholders at a general meeting of the company.

Although potential directors are usually identified and nominated by the current directors, the election of directors is one of the most important responsibilities of shareholders, electing individuals who will manage the affairs of the company of which they are the owners.

Once elected, a person only becomes a director when the company has received written consent from the new director (section 66 (7)).

Filling vacancies on the board of directors

There are numerous reasons why a vacancy on a board of directors occurs. Reasons such as:

• a person’s term of office as director expires (if the company’s Memorandum of Incorporation provides for fixed terms),
• the death of a person,
• the resignation of a director,
• an ex officio director ceases to hold the office, title, designation, or similar status that allows a person to be an ex officio director,
• incapacitation of a person, unable to perform the functions of a director, and unlikely to recover within a reasonable period of time,
• a director is declared delinquent by a court or placed on probation,
• a person becomes ineligible or disqualified in terms of section 69, or
• a director is removed according to section 71 of the Act, by resolution of the shareholders, or the board of directors, or by order of the court.

If a vacancy arises on the board, other than as a result of an ex officio director ceasing to hold that office, it must be filled by:

• a new appointment (if the director was appointed by a person who was named or determined in terms of the Memorandum of Incorporation (section 66 (4)),
• a new election conducted at the next annual general meeting (AGM) (when the company is state-owned or a public company), or
• in any other case, within 6 months after the vacancy occurred, at a general meeting called for the purpose of electing the new director. In this case, an election may be conducted by means of a written poll of the persons entitled to exercise voting rights in an election of the director.

Words of caution

Section 66 (6) of the Act accentuates that the election or appointment of a person is legally void, if ‘at the time of the election or appointment, that person is ineligible or disqualified’ in terms of section 69 of the Act.

Therefore, it is crucially important to be aware of persons who are ineligible or disqualified to be appointed or elected as a director of a company.

Persons who are ineligible for appointment or election as a director

Section 69 (7) of the Act specifies that the following persons are ineligible to serve as director of a company:

• a juristic person,[6]
• a minor who is still under parental authority (unemancipated), or who is under a similar legal disability,
• a person who does not meet the requirements described in the company’s Memorandum of Incorporation.

Persons who are disqualified from being a director

According to section 69 (8) of the Act, a person is disqualified to become a director of a company if the person:

• has been prohibited to be a director by a court,
• has been declared by a court to be delinquent in terms of the Act (section 162) or the Close Corporations Act (Act 69 of 1984, section 47),
• is an unrehabilitated insolvent,
• is prohibited in terms of any public regulation to be a director of the company,
• has been removed from an office of trust, on the grounds of misconduct involving dishonesty,
• has been convicted and imprisoned without the option of a fine, or fined more than the prescribed amount, for theft, fraud, forgery, perjury, or an offence:
• entailing fraud, misrepresentation, or dishonesty,
• in connection with the promotion, formation, or management of a company, or
• an offence committed under one of the following Acts:
• the Companies Act (Act 71 of 2008)
• the Insolvency Act (Act 24 of 1936)
• the Close Corporations Act (Act 69 of 1984)
• the Competition Act (Act 89 of 1998)
• the Financial Intelligence Centre Act (FICA) (Act 38 of 2001)
• the Securities Services Act (Act 36 of 2004)
• the Prevention and Combating of Corruption Activities Act (Act 12 of 2004) of which chapter 2 is relevant

Director conduct

Section 76 of the Act describes what is required from a director regarding his/her conduct. Section 76 sets a high standard, demanding that a director will perform in such a way that it is in the best interest of the company and in good faith.

It is expected from each director, including an alternate director, to act honestly and take responsibility for all of their actions.

Section 76 states clearly, among other requirements and standards, the following regarding a director’s conduct:

A director of a company must:

• not use the position of a director, or any information obtained while acting in the capacity of a director:
• to gain an advantage for the director, or for another person other than the company or a wholly-owned subsidiary of the company, or
• to knowingly cause harm to the company or a subsidiary of the company, and
• communicate to the board at the earliest practicable opportunity any information that comes to the director’s attention, unless the director reasonably believes the information is immaterial to the company or generally available to the public.

Furthermore, the responsibilities imposed under section 76 do not replace any duties required from a director under the common law.

Liabilities of directors

Section 19 (2) of the Act is clear about the extent of the liabilities of a company director, explaining, ‘A person is not solely by reason of being an incorporator, shareholder, or director of a company, liable for any liabilities or obligations of the company, except to the extent that this Act or the company’s Memorandum of Incorporation provides otherwise.’

With regard to a personal liability company, ‘the directors and past directors are jointly and severally liable, together with the company, for any debts and liabilities of the company as are or were contracted during their respective periods of office.’ (Section 19 (3))

Section 77 of the Act explores the liabilities of company directors at length, describing in section 77 (3), inter alia, that a director of a company is liable for any loss, damages, or costs sustained by the company as a direct or indirect consequence of the director having:

• acted in the name of the company, signed anything on behalf of the company, or purported to bind the company or authorise the taking of any action by or on behalf of the company, despite knowing that he or she had no authority to do so,
• continued with the company’s business despite knowing it is reckless and prohibited in terms of section 22 of the Act,
• been a party to an act or omission by the company despite knowing that the act or omission was calculated to defraud a creditor, employee, or shareholder of the company,
• signed, consented to, or authorised the publication of:
• any financial statements that were false or misleading in a material respect,
• a prospectus that contained false or misleading content,
• been present at a meeting, or participated in the making of a decision, and failed to vote against:
• the issuing of any unauthorised shares,
• the issuing of authorised securities that was inconsistent with section 41 of the Act,
• provided financial assistance to a director or any other person inconsistent with the requirements of the Act and the Memorandum of Incorporation.

In addition, section 77 (6) states that a director is jointly and severally liable with any other person who is or may be held liable for the same act.

Responsibilities and duties of directors

The Act states that a company’s Memorandum of Incorporation (MOI) describes, inter alia, ‘the rights, duties, and responsibilities’ of directors within and in relation to a company.

The following is a list of responsibilities and duties[7], derived from different sections in the Act, to be performed, individually, or collectively as a board of directors, by a company director:

• Section 15 (6) determines that the Memorandum of Incorporation (MOI) and any rules of the company is binding between the company and each director.

• Section 30 (3)
• The directors are obliged to compile a directors’ report to accompany the company’s financial statements. The report must cover aspects such as:
• the ‘state of affairs, the business, and profit or loss of the company,’ including
• any significant and important material to enable the shareholders to comprehend the company’s state of affairs, and
• any information as prescribed.
• The board of directors is required to approve the financial statements.
• An authorised director has to sign the approved financial statements.

• Section 32 (6) describes that a director of a company is not allowed, ‘by any act or omission, [to] mispresent to any person, in any way or to any degree, the true legal status of the company.’

• Section 66 (1) specifies that 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.’ The extent of the powers and functions is subject to the Act and Memorandum of Incorporation.

• Section 90 (4) states that ‘if a company that is required to appoint an auditor does not do so when it registers the incorporation of the company, the directors of the company must appoint the first auditor of the company within 40 business days after the date of incorporation of the company.’

• According to section 90 (7), if an auditor is not appointed or reappointed on an annual general meeting (AGM) of a company, the directors must appoint a new auditor according to the procedure set out in the Act within 40 business days after the date of the AGM.

• Section 93 (1) determines that the directors or prescribed officers of a company are required to provide ‘any information and explanations necessary’ for the company’s auditor in order to perform his/her duties.

• Section 94 (10) rules that the appointment and duties of a company’s audit committee do not lessen the functions and duties of the directors of a company.

• Section 137 (2) regulates that when a company is in a business rescue, each director is required to ‘continue to exercise the functions of a director’, subject to the authority of the business rescue practitioner.

• Section 137 (3) cites that each director of the company has to take care of the business rescue practitioner’s requests at all times, providing the practitioner with any information concerning the affairs of the company as may be acceptably required.

• According to section 142 of the Act, directors of a company have the following obligations to a business rescue practitioner:
• Each director must hand over all books and records relating to the affairs of the company and that are in the director’s possession (section 142 (1)).
• Any director, aware of the whereabouts of other books and records that are related to the company, must let the practitioner accordingly know (section 142 (2)).
• Within five business days (or a longer period allowed by the practitioner) after the start of business rescue proceedings, directors of a company must provide the practitioner with a statement that includes details of at least the following:
• any material transactions, occurring within 12 months before the business rescue proceedings started, in which the company or the assets of the company is involved,
• any proceedings involving a court, arbitration, or of an administrative nature,
• the assets, liabilities, income, and disbursements of the company within the preceding 12 months,
• the number of employees, as well as collective agreements or other agreements regarding the rights of employees,
• any debtors and their obligations to the company, and
• any creditors and their rights and claims against the company.

Remuneration of directors

Remuneration of directors can cause much tension between shareholders and directors and was in the past and still is a much-debated topic.

Both executive and non-executive directors provide services to the company for which remuneration is to be paid. The question is how much?

Disclosure of directors’ remuneration

Section 30 (4) of the Act requires that the information about the benefits and remuneration received by directors be disclosed. This should, inter alia, include:

• the amount of any pensions paid by the company to directors,
• any amount, paid or payable, to a pension scheme,
• the amount of any compensation paid in respect of loss of office,
• the number and class of any securities issued to a director and the consideration received by the company for those securities,
• details of service contracts for current directors.

In addition, section 30 (6) regulates that the following items are included in the remuneration of directors:

• fees paid to directors for services rendered by them for and on behalf of the company,
• salary, bonuses, and performance-related payments,
• expense allowances (to the extent that the director is not required to account for the allowance),
• contributions paid under any pension scheme,
• the value of any option or right given directly or indirectly to a director,
• financial assistance to a director for the subscription of shares,
• regarding any loan or other financial assistance by the company to a director, or any loan made by a third party to a director, if the company is a guarantor of that loan, the value of any interest deferred, waived, or forgiven.

References

Companies Act 71 of 2008

Duties of Directors, Deloitte, April 2013

[1] Accentuations in citations from the Companies Act are by the article writer.

[2] A private company is a company privately owned by one or more shareholders. A private company is not allowed to issue shares to the general public.

[3] A personal liability company is mainly used by professionals such as lawyers, accountants, and engineers. The directors of such a company, as well as previous directors, are responsible for the debts of the company.

[4] A public company is a company whose shares are freely traded on stock exchanges.

[5] A non-profit company is an entity set up to utilize its revenue and profits for good causes and to help people.

[6] A juristic person is viewed as an entity, such as a company, and also considered to be a ‘person’ subject to the law, having legal rights and obligations.

[7] The list does not claim to be a complete list of the responsibilities and duties of directors as described in the Companies Act.