As a nation, we are slowly trying to rise from the ashes created by the COVID-19 pandemic. Many have been adversely affected by the impact of this global pandemic and our economy is not an exception. With a negative growth rate, things are looking tough and it is crucial that steps be taken to bring our economy out of the rut. As in most developing nations, it may well be that the small business sector is where real growth may potentially come from. If so, we may see a greater move towards entrepreneurship and often in the form of the incorporation of new companies. If you are thinking in this direction, then this Legal Insight is for you. There are number of legal issues you should be aware of as a company owner, but this insight will focus specifically on the basic duties and responsibilities for new directors. It may also serve as a good refresher for existing directors who are somewhat rusty on the basics. This is what you need to know:
As a director, you are a member of the board of a company. The board is basically like the pilots in a plane’s cockpit. It provides the company (the plane) with operational and strategic direction. The board also has the authority to exercise all the powers and perform all the functions within a company, unless this is restricted by the Companies Act 71 of 2008 (“Companies Act”) or the Memorandum of Incorporation (“MOI”) of the company. The minimum composition of the board will be dependent on the type of company you choose to register and this may be increased by the Company’s MOI.
There are three sections of the Companies Act that are at the core of your duties as a director. Namely, sections 75 (Director’s personal financial interests), 76 (Standards of director conduct) and 77 (liabilities of directors and prescribed officers). While these are not the only sections that have a bearing on your appointment as a director, they are foundational to your understanding of this position. Each provision is now addressed in turn.
Section 75 regulates personal financial interests of directors. It provides that where you, as a director, have a financial interest in a matter that is tabled before the company on which you are a board member, you are expected to disclose that financial interest. You will not have this obligation if you are the sole director and shareholder in the company, as that would not serve any purpose for obvious reasons. However, if you, for instance, receive equity investment into your company whilst you are the sole director, you will need to disclose any agreement or matter where you or a related person have a personal financial interest to the shareholders of the company. Once the disclosure is made, a director may be requested, in terms of the Companies Act, to share information that is relevant to that disclosed interest, which may have an impact on the company. If this occurs in a meeting, the director may be requested to leave the meeting in question, whereafter a decision will be made on whether or not the company wishes to pursue the opportunity despite the disclosed interest. Failure to disclose your interest as a director can result in liability in terms of section 77, amongst other things.
The next important section is section 76 of the Companies Act. This section provides for standards of director conduct. In essence, section 76 codifies the fiduciary duties of directors, to a certain degree. However, these fiduciary duties must still be considered in context of the general fiduciary duties that exist at common law. As a director, you are expected to refrain from using information that you are exposed to by virtue of your directorship, for your own personal benefit or advantage. Furthermore, as a director, you are expected to act in good faith, for proper purpose, in the best interests of the company and with the necessary degree of care skill and diligence that can reasonably be expected of (i) someone carrying out the same functions as you; and (ii) a person that has the same general knowledge, skills and experience as you. However, as a director of a small company, it is highly likely you may be wearing many hats in the entity. Fortunately, the law does not expect you to be an expert at everything and makes provision for the business judgment rule. This rule provides that if you (i) take the steps required to be informed about a matter; (ii) either had no financial interest in the matter or you disclosed that interest; and (iii) made your decision or supported a decision of a committee or the board and you had a rational basis to believe that it was in the best interests of the company, you may be found to have observed the required standards of director conduct. This rule also provides that, as a director, you may be entitled to rely on information, reports, statements or opinions that you receive from employees, committee members, legal counsel, accountants or other professionals. However, your reliance is subject to the proviso that you must have reasonably believed that such persons were reliable and competent. Furthermore, you will only be able to rely on the such information from committee members as a director where you are not a member of that committee and where you have no reason to believe that the committee’s actions do not merit confidence.
Lastly, section 77 of the Companies Act contains critical provisions that every director in South Africa should read prior to accepting appointment to a board. This section provides for instances in which you may be held personally liable as a director for any loss, damages or costs that are sustained by the company following your conduct under certain circumstances. Potential liability can span from instances of dishonesty, to failing to vote against decisions that were contrary to the provisions of the Companies Act. Liability of directors is joint and several with any other person who may be liable for the same act. This provision thus has very personal consequences for you as a director.
The above is a simplified version of what the Companies Act expects from you as a prospective or current director. It is a major responsibility that should not be undermined. Remember that once you accept your appointment as a director to a board, you accept the full extent of the duties and responsibilities that the Companies Act and the common law impose on you. Ensure that you fully understand the legal implications before begin register your new company and become a director.tu
Tshepiso Scott, Director, Tumbo Scott Inc