6) Board Accountability and Corporate Abuses Flashcards
What are the qualification requirements for directors?
The act does not specify any minimum qualifications required to act as a director (a MOI may do so) however, director may not be disqualified or ineligible.
What makes a person ineligible to be a director?
Juristic persons are ineligible.
Unemancipated minor (or under similar legal disability)
Does not satisfy any qualifications set out in MOI
What disqualifies a person from being a director?
The court has prohibited the person to be a director or declared the person delinquent in terms of the Companies Act.
Unrehabilitated insolvent.
Prohibited in terms of any public regulation to be a director.
Removed from office of trust on grounds of misconduct involving dishonesty.
Convicted and imprisoned without option of a fine/fines more than the prescribed amount for theft, fraud, perjury or, an offence involving fraud, misrepresentation, dishonesty in connection with promotion, formation or management of a company.
What are a directors duties under section 76(2)?
Must not use position of director or information obtained to gain advantage for himself or for anyone else than the company or a wholly owned subsidiary (fiduciary duty)
May not do anything to knowingly cause harm to company or subsidiary.
Must communicate to board any practicable information unless he reasonably believes that the information is immaterial/generally available to the public/known by other directors.
Rule against corporate opportunity.
- i.e., If you become aware of an opportunity through your role as a director, you cannot then fail to disclose the fact that this opportunity exists and then go and take the opportunity.
Must not make secret profits.
Must not compete against the company
What are a directors duties under section 76(3)?
A company director must exercise all powers and functions of director :
- In good faith for proper purpose
- In best interests of company
- With degree or care, skill, and diligence that may reasonably be expected of person carrying out same functions and having general knowledge, skill and experience of director
What is the business judgement rule provided in section 76(4)?
As far as any matter is concerned, a director will not be liable for breach if that director:
- Has taken reasonably diligent steps to become informed about the matter
- Has either no material financial interest in the subject matter of the decision or disclosed any financial interest in terms of the Act
- Believes that decision was in best interests of company and has a rational basis for holding such belief.
Who cannot be appointed as auditor?
Director/secretary/ prescribed officer
Employee/consultant of company engaged for more than one year in maintenance of financial records or preparation of financial statements
Person who:
- Habitually performs duties of accountant or bookkeeper or related secretarial work for company
- Has acted in any such capacity for five yeas immediately preceding date of appointment.
What are the principles related to formation of an audit committee?
At each AGM, a public/state-owned/other company that are required by its MOI to have an audit committee, must elect an audit committee comprising of at least 3 members, unless:
- The company is a subsidiary of another company that has an audit committee
- The audit committee of that other company will perform the functions required under this section on behalf of that subsidiary company
What does it mean to pierce the corporate veil?
In certain circumstances, the law will withdraw the right of separate legal personality and hold insiders liable by disregarding the company’s separate existence.
What are the differences between common law for and statutory form of veil piercing?
The court will be able to pierce the corporate veil easily instead of seeing it as a remedy of last resort as per the common law; common law still applies
Unconscionable injustice vs unconscionable abuse
- Unconscionable injustice- looking at the plaintiff
- Unconscionable abuse- looking at the defendant
Common law- you don’t have to prove an unconscionable abuse
Statue (section 20(9))- you must prove the unconscionable abuse (must look at the circumstances of the case)
What does it mean for have reckless trading prohibited?
A company must not carry on its business recklessly, with gross negligence, with intent to defraud any person or for any other fraudulent purpose.
- If the Commission has reasonable grounds to believe that a company is (a) engaging in such conduct, or (b) unable to pay its debts as they become due and payable in the normal course of business (insolvent), it may issue a notice to the company which requires the company to show why it should be permitted to continue to carry on its business/to trade.
- The company then has 20 business days to provide evidence that either (a) or (b) is not the case.
- Failing to do this within 20 business days may result in the Commission then issuing a compliance notice to the company requiring it to cease carrying on business/trading.
Reckless trading prohibition is aimed at the company.
- If a director is involved in reckless trading, the business judgement rule doesn’t apply as this is gross negligence and one of the duties of a director is to act with a degree of care that would be reasonably expected from a person carrying out the same activities etc.
- Director can in fact be declared to be a delinquent if engaging in this and barred from directorship for 7 years
What are the principles relating to directors personal financial interests?
If a director has any personal financial interest in respect of a matter to be considered at a meeting, he must disclose the interest and its general nature before matter is considered.
In addition, such director:
- Must disclose any material information relating to matter;
- May disclose any observations or pertinent insights if requested;
- Must then leave meeting immediately;
- Must not take part in consideration of matter.
At such a meeting, the director is regarded as:
- Being present for purposes of determining quorum to vote on the decision. (Quorum to commence)
- Not being present for purposes of determining whether there is sufficient support to pass the resolution; quorum to make the decision.
(E.g. If there are 5 directors, need 3 for quorum and financially interested director counts but then only need 2 instead of 3 to pass resolution.
- If there is a related person who the director knows (actual knowledge or constructive knowledge) has a financial interest, the director must also disclose this.
What is the delinquency remedy for shareholders against directors?
Who has standing to bring the application?
- The company, directors, shareholders, representatives of employees (trade unions) and the commission itself.
How long does delinquency last?
- Conditional delinquency: 7 years
- Unconditional delinquency: life
When must the court declare the director delinquent?
- When the person in question has consented to act as director, even when ineligible/disqualified or; - When the person in question is acting in manner that amounts to gross negligence, wilful misconduct or breach of trust.
What is the probation remedy for shareholders against directors?
Who has standing to bring the application?
- The company, directors, shareholders, representatives of employees (trade unions) but not the commission.
How long does probation last?
- 5 years maximum
When may the court make an order?
- When the person in question is acting in manner which is materially inconsistent with the duties of a director.
- When the person in question is present at a meeting but fails to vote against a resolution, despite knowing that the company fails to satisfy the solvency and liquidity test.
- Court can order stuff such as community service
- Probation is a less-serious version of delinquency.
- Under delinquency, you are unable to become a director again but under probation, you are able to.
What are the principles related to indemnification and directors insurance?
If a company is able to indemnify a director, it means that they have an insurable interest.
- If a person is suing the director, then, if the director is indemnified, the company will be liable for the damages.
The company may:
- Advance expenses (pay for the legal costs/litigation) to the director in order to defend themselves through litigation in proceedings arising out of service to the company if:
o Proceedings are abandoned or director is exculpated (declared not guilty) or;
o Proceedings relate to a matter for which the director is indemnified; unless the MOI provides otherwise.
- Indemnify the director against any liability that arises (i.e. pay for personal liability), unless it relates to:
o Wilful misconduct (knowingly did something wrong; indicates intent);
o Wilful breach of trust;
o Payment of a fine.
