6) Board Accountability and Corporate Abuses

Question 1

What are the qualification requirements for directors?

Answer 1

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.

Question 2

What makes a person ineligible to be a director?

Answer 2

Juristic persons are ineligible.

Unemancipated minor (or under similar legal disability)

Does not satisfy any qualifications set out in MOI

Question 3

What disqualifies a person from being a director?

Answer 3

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.

Question 4

What are a directors duties under section 76(2)?

Answer 4

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

Question 5

What are a directors duties under section 76(3)?

Answer 5

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

Question 6

What is the business judgement rule provided in section 76(4)?

Answer 6

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.

Question 7

Who cannot be appointed as auditor?

Answer 7

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.

Question 8

What are the principles related to formation of an audit committee?

Answer 8

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

Question 9

What does it mean to pierce the corporate veil?

Answer 9

In certain circumstances, the law will withdraw the right of separate legal personality and hold insiders liable by disregarding the company’s separate existence.

Question 10

What are the differences between common law for and statutory form of veil piercing?

Answer 10

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)

Question 11

What does it mean for have reckless trading prohibited?

Answer 11

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

Question 12

What are the principles relating to directors personal financial interests?

Answer 12

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.

Question 13

What is the delinquency remedy for shareholders against directors?

Answer 13

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.

Question 14

What is the probation remedy for shareholders against directors?

Answer 14

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.

Question 15

What are the principles related to indemnification and directors insurance?

Answer 15

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.

Question 16

What are the restrictions to indemnifying directors?

Answer 16

General Limitation - Any provision in the agreement/MOI/rules/resolution is void to the extent that it:

• Purports to relieve a director of his duties in terms of sections 75 or 76;

E.g. “This director doesn’t have a duty of good faith.”

• Purports to relieve a director of his liability in terms of section 77;
• Negates/limits/restricts the legal consequences arising from an act or omission which constitutes a wilful breach of trust/wilful misconduct.

The company may not pay a fine that was imposed on a director, on his behalf.

• E.g. The director approves a prospectus with false information

(the company cannot indemnify the director)

The company may insure itself against the risk of expenses which may be validly incurred in terms of above.

Question 17

What are the requirements around company secretaries?

Answer 17

Every company secretary must:

• Have requisite knowledge of, or experience in, relevant laws, and;
• Be a permanent resident of the Republic, and remain so while serving in that capacity.

Public companies/state-owned enterprises must have a company secretary.

They are a prescribed officer.

Question 18

What are the duties of the company secretary?

Answer 18

• Providing directors with guidance as to their duties;
• Making directors aware of any law relevant to/affecting the company;
• Reporting any failure on part of company/director to comply with the Act to the board and;
• Certifying annual financial statements.

A company secretary can be a juristic person or a partnership, provided that:
- Every employee of that juristic person, who provides company secretary services or partners in partnership is not disqualified to serve as a director;
- At least one employee or partner of that juristic person satisfies the mandatory requirements.

Question 19

Which companies annual financial statements must be audited?

Answer 19

Any public company (larger social impact), and;

A private company, if:
- They are required to have statements audited in terms of regulations or;
- They voluntarily choose to have statements audited or;
- A private company with a public interest score of 350 or more must be audited.
- Must also be audited if financial statements are internally generated and their public interest score is between 100 and 350.

(If externally compiled do not need to be audited.)

• If company has a public interest score of 500 or more, the company is required to have a social and ethics committee.
• If the MOI of the company states that the company must be audited.
• If an audit is not necessary, the financial statements must independently reviewed in a manner which satisfies regulations.

Private companies exempt from review:
- Every person who is a holder of/has beneficial interest in securities issued is also director.

Question 20

What is the components of calculating a company’s public interest score?

Answer 20

Turnover
- 1 point per R1 million (or portion of)

Shareholders
- 1 point per employee

3rd Party Liablity
- 1 point per R1 million (or portion of)

Employees
- 1 point per employee

Question 21

What are the principles relating to the auditor of a company?

Answer 21

Must be appointed every year at the AGM.
- To be appointed, person must be a registered auditor.
- The person must be acceptable to the audit committee as being independent of the company.

Who Cannot be Appointed as an Auditor? - Director/secretary/prescribed officer; - Employee or consultant of the company engaged for more than one year in maintenance of financial records or preparation of financial statements; or - A person who habitually performs duties of an accountant or bookkeeper or related secretarial work for the company, or o A person who has acted in any such capacity for five years immediately preceding date of appointment.

Question 22

Who Cannot be Appointed as an Auditor?

Answer 22

Director/secretary/prescribed officer;

Employee or consultant of the company engaged for more than one year in maintenance of financial records or preparation of financial statements; or

A person who habitually performs duties of an accountant or bookkeeper or related secretarial work for the company, or

A person who has acted in any such capacity for five years immediately preceding date of appointment.

Question 23

What are the rights of the auditor?

Answer 23

Right to access, at all times, the accounting records/books/documents of the company.

May require, from the directors, any information necessary for the performance of duties.

A holding companys auditor has the right to current and former financial statements of any subsidiary and may require, from the directors of the holding company, or subsidiary, any information and explanations necessary to fulfil duties.

Entitled to attend any general shareholder meetings and receive all notices of and communications relating to such meetings.

Entitled to be heard at a meeting.

May apply to court for appropriate order to enforce rights of the auditor.

May not perform any services for company that would place auditor in conflict of interest.

Question 24

What are the duties of the audit committee?

Answer 24

Nominate an independent person for the appointment as auditor;

Determine fees to be paid to auditor and terms of engagement;

Ensure that appointment complies with legislation;

Determine nature and extent of non-audit services provided;

Pre-approve proposed agreements with auditor for above;

Prepare a report to include in annual financial statements:
- Describing how committee carried out its functions;
- Stating whether the audit committee is satisfied with the auditors independence;
- Commenting, as considered appropriate on:

o Financial statements;
o Accounting practices;
o Internal financial control of the company.

Receive and deal with concerns/complaints regarding the above;

Make submissions to board on relevant matters;

Perform any other oversight functions determined by board;

Question 25

What is the difference between piercing the corporate veil and the alter-ego doctrine?

Answer 25

Piercing the corporate veil is the broader doctrine that allows courts to hold individuals liable for corporate obligations, while the alter-ego doctrine is one specific rationale for doing so, focusing on the misuse of the corporation as a personal tool by its owners.

Question 26

What are the common law principles on Veil Piercing?

Answer 26

The separate legal personality of a company is to be recognized and upheld except in the most unusual circumstances.

A court has no general discretion simply to disregard the existence of a separate corporate identity whenever it considers it just or convenient to do so.

Used as a last resort measure

Question 27

When Would the Court Pierce the Veil?

Answer 27

The circumstances in which a court will disregard the distinction between a corporate entity and those who control it are far from settled:

• The Cape Pacific case sets out a number of general principles/factors that a court must take into account when exercising discretion.
• Examples of the abuse of the separate legal personality:

o Separate legal personality was used as a device by a director to evade his or her fiduciary duties.
o Separate legal personality used to overcome a contractual duty.

• Fraud is relevant, but not essential for the abuse of the separate legal personality.

Question 28

What is statutory veil piercing?

Answer 28

Whenever a court finds that the incorporation of, or any act by or on behalf of, or any use of, that company constitutes an unconscionable abuse of the juristic personality of the company as a separate entity, the court may declare that the company is to be deemed not to be a juristic person in respect of such rights, obligations or liabilities of the company

Question 29

What are the reasons for piercing the corporate veil?

Answer 29

There must be some sort of misuse or abuse of the distinction between personalities.

• Calculated to benefit themselves (director) unfairly as individuals if they engage in fraud etc.

o E.g. If you want to overcome contractual obligations by abusing separate legal form - want to overcome restraint of trade you have