LU 6 - Corporate Governance: Directors

Question 1

What are directors?

Answer 1

Those individuals empowered by the MOI to determine the Co’s strategic direction
- They are entrusted by the shareholders with the ultimate responsibility for the functioning of the co

Question 2

What is the s6 definition of a director?

Answer 2

A member of the board of a Co
or an alternative director of the Co
including any person occupying the position of director or alternate director,
by whatever name designated
- The Act provides the board with all the authority it requires to manage and guide the business of the Co

Question 3

Number of directors per company type?

Answer 3

• Private or personal liability co: At least 1 director (MOI may specify more)
• Public, NPC or SOC at least 3 directors (MOI may specify more)
  a. Public and SOC = 6 directors (3 x board + 3 x audit committee)
  b. Listed Cos + SOCs with a PI score >500 must have 6 directors (3 board + audit committee + social and ethics committe + 1 must be independent non-exec)

Question 4

What happens if a co does not have the prescribed number of directors?

Answer 4

Any act done by the board or co will remain valid.

Question 5

Discuss ‘types of directors’

Answer 5

• In law there is no real distinction between different categories of directors
• Thus, all directors are required to comply with the Act and the required standard of conduct
• King III provides definitions for each type of director
  a. Which is important for 1) determination of remuneration and publication thereof; 2) membership of board committees
• Directors need not be employees of the Co

Question 6

What is an ‘independent director’?

Answer 6

1. Does not have interest in Co (no more than 5% shares)
2. Not related person of executive employee
3. Not in contractual or statutory relationship with Co which to outside would be seen as material interference to act independently

Question 7

What is an ‘ex officio’ director?

Answer 7

• Holds office as a director of a company
  solely as a result of holding another office or title, designation or status.
• Not appointed by shareholders.
• Same functions and responsibilities as other directors except where MOI provides otherwise.
• Must be specified in MOI

Question 8

Discuss the election and appointment of directors

Answer 8

1. With few exceptions, anyone can be appointed as a director
2. King IV and JSE listing requirements
3. MOI may provide for-
   a. The appointment or removal of director by person named in MOI
   b. Appointment of ex officio directors
   c. Appointment of alternate directors
4. Majority votes
5. In case of a vacancy: Board may appoint until direct is elected and appointed, unless MOI states differently
6. Profit companies shareholders to elect at least-
   a. 50% of directors
   b. 50% of alternate directors

Question 9

Discuss the removal of directors

Answer 9

1. A director may be removed by an Ordinary Resolution adopted at a shareholder’s meeting
   - Unless contrary to the following
   a. Removal by shareholders:
   i. The MOI or rules
   ii. Any agreement between a co and a director
   iii. Any agreement between any shareholder and a director
   b. Removal by directors:
   i. A company has more than 2 directors and a shareholder or director alleges, and board resolved that a director has become inelligivle or disqualified to be a a director
   ii. A director becomes incapacitated
   iii. A director has neglected or has been derelict in the performance of his duties
2. Must receive notice of the meeting and resolution same day as shareholders
3. The director must be given a reasonable opportunity to make a PRESENTATION to the meeting before the resolution is voted upon by the shareholders or the board
4. If the removal constitutes a breach of contract the director may claim damages or other compensation for loss of office

Question 10

Who are ineligible to be a director?

Answer 10

1. Juristic person
2. Unemancipated minor or similar legal disability
3. Does not satisfy qualifications set out in MOI
   - These are absolute, no exceptions.
4. Under probation: Ineligible except to extent permitted by order of probation

Question 11

Discuss ‘disqualification of directors’

Answer 11

1. Prohibited by court order to declare delinquent
2. Unrehabilitated insolvent
3. Prohibited by public regulation
4. Removed from office of trust for dishonesty (ends after 5 years)
5. Convicted and imprisoned without option to fine or fined more than prescribed amount for theft, fraud, forgery, perjury
6. Or an offence-
   a. Involving fraud, misrepresentation, dishonesty
   b. Related to promotion, formation, management of company
   c. Offence ito Co or specified acts (ends after 5 years)
7. MOI impose additional grounds

Question 12

What is the position of directors who are disqualified?

Answer 12

1. An ineligible or disqualified person must not be appointed or elected as director
2. May not consent to be a director
3. May not act as a director
4. A company must not knowingly permit an ineligible or disqualified person to serve as a director
5. Exception: Peerson removed from position of trust for dishonesty or convicted of theft, fraud etc. May be director of private company if he is sole shareholder or other shareholders are related to him and have consent in writing

Question 13

Discuss ‘delinquent directos’

Answer 13

1. The applicant may be the co, a shareholder, a director, co secretary or prescribed officer, trade union or another representative of the employees, the Commission or panel, organ of state (limited right)
2. A delinquent director is disqualified from being a director either unconditionally and for life, or for at l;east 7 years
3. The grounds for an order of delinquency include:
   a. Consenting to act as director while ineligible or disqualified
   b. Acting as director in contravention of an order of probtion
   c. Gross abuse of power
   d. Personal advantage of information or opportunity
   e. Caused harm through gross negligence or intention
   f. Acted in a manner: Gross negligence, willful misconduct or breach of trust
   g. Repeatedly subject to personal compliance notices for substantially similar contraventions
   h. At least twice been personally convicted of offence; subjected to an administrative fine, or similar penalty
   i. Within 5 years, was director or managing member of a co or CC that was found guilty of an offence, or subjected to administrative fine and court is satisfied that the declaration of deliquency is justified

Question 14

Discuss ‘probation’

Answer 14

1. Company, shareholder director, co secretary, officer, registered trade union or rep of employees may apply
2. Court will make a decision based on circumstances
3. An order of probation may not exceed 5 years
4. May limit application to certain categories of companies
5. The court may impose conditions to an order of delinquency or probation, such as remedial education, community service, or supervision by a mentor
6. What are the grounds for probation?
   a. Grounds for delinquency
   b. Being present and failing to vote against a resolution, despite the solvency and liquidity test not being met
   c. Acted in a manner materially inconsistent with duties of director
   d. Within a period of 10 years from effective date
   e. 2 or more cos or CCs were not able to pay creditors or meet all obligations
   - Except if ito business rescue plan or compromise with creditors

Question 15

Name 5 ways in which a vacancy is created

Answer 15

1. Fixed term appointment expired
2. Resigns or dies
3. Stops living in RSA
4. Removed by shareholders or directors or court
5. Declared delinquent by a court

Question 16

Briefly discuss ‘meetings’

Answer 16

• CAN be called by director when authorised by board
• MUST be called if 25% or more of directors require it
• Can be conducted entirely or partially through e-communication
• The Board determines the time, format, in line with MOI

Question 17

When is a committee NOT a board committee?

Answer 17

When it is required ito the Act

Question 18

Discus ‘committees’

Answer 18

1. Except to the extent provided in the MOI, board may appoint any number of committees and may delegate any of its authority to a committee (s72)
2. Board remains liable for the proper performance of the duty
3. King Code recommends that public listed companies should have an audit, remuneration, nomination and risk management committee
4. Act makes Audit Committee compulsory for all public and SOCs, others may elect to have it
5. The Act also provides for Social and Ethics Committee

Question 19

Discuss the Social and Ethics Committee

Answer 19

• Required for public, SOC, and companies with PI score >500
• Committee must have at least 3 directors or prescribed officers (1 must not be involved in the day-to-day management (i.e. independent non-executive))
  Point is to-
  a. Monitor co’s activities ito legislation, legal requirements, code of good practice
  i. Social and economic development
  ii. Good corporate citizenship
  iii. Donations and charity
  iv. Consumer and public relations
  v. Labour and employment
  b. Bring matters to attention of Board
  c. Report to shareholders at AGM
• No legislative requirement for committee to issue written report (but recommended).

Question 20

Discuss the remuneration committee

Answer 20

• Remuneration of Co directors is a sensitive and topical issue facing the Board today
• Thus, crucial element of good corp governance to establish a committee whose sole focus is to consider and recommend the level and form of the directors’ remuneration
• King III suggests that committee should only comprise members of the board. Majority should be non-executive and independent.
• The chairman of the committee should be an independent, non-executive director. Chair of the board should not chair the remuneration committee.
• Must remain up to date on appropriate levels, structuring methods and types of remuneration in the environment in which co operates
• Must maintain a fine balance between recommending over-generous remuneration not in SHs interest, and a level that still attracts the desired quality

Question 21

Discuss the rights of directors

Answer 21

1. Participate in the strategic management of the co and attend and vote at board meetings
2. Take independent professional advice at the expense of the co
3. Inspect the co’s accounting records, assisted by an accountant
4. To receive reasonable notice of meetings
5. To claim reimbursement for expenses incurred
6. To discharge duties without interference from co-directors

Question 22

Discuss the duties of directors

Answer 22

• The Co Act has partially codified the common law duties of directors
• The intention of the legislature: Confirm common law and encourage directors to act honestly and bear responsibility for their conduct
• Common law still applies if not in conflict with the Act
  1. A director has POSITIVE and NEGATIVE duties

Question 23

Ito duties and liabilities, the term ‘director’ extends to?

Answer 23

1. Alternate director
2. Prescribed officer
3. Member of Board Committee
4. Member of Audit Committee
5. Member of Social and Ethics Committee

Question 24

What is a prescribed officer?

Answer 24

Includes every person, by whatever title the office is designated, that-

a. Exercises general executive control over and management of whole, or significant portion, of the business and activities of the Co; or
b. Regularly participates to a material degree in the exercise of general executive control over and management of whole, or a significant portion, of the business and activities of the co

Question 25

Discuss the ‘duty of care, skill and diligence’

Answer 25

1. Director is required to act with care, skill and diligence that could be expected from someone with that director’s knowledge and experience, and from a reasonable person in that director’s position
2. More can be expected from directors with above average skills
3. Test is not lower for directors with below-average skills, it is till tested against reasonable person.
4. In each instance both 1) the objective part of the test (measured against person carrying same functions) and 2) the subjective element of the test (measured against a person having the same knowledge, skill and experience) will be applied.

Question 26

Which case is applicable to the test for duty of care, skill and diligence?

Answer 26

Fisheries Development Corp v AWJ Investments

Question 27

What are the 2 parts of the positive duties of directors?

Answer 27

1. Did the director comply to this standard (duty of care, skill and diligence)?
2. Business judgment rule

Question 28

Discuss the Business Judgment Rule

Answer 28

1. Director had taken reasonably diligent steps to become informed about the matter in question
2. Director had no material personal financial interest in the matter or had no reasonbale basis to know the realted person had a personal financial interest (and had disclosed the interest to the board or shareholders)
3. Director made the decision on a rational basis believing that the decision made by him or the board was in the best interest of the company
4. The director is entitled to rely on the performance of
   a. Employees
   b. Legal counsel, accountants, the Board, committees of the Board
   c. Persons to whom authority was reasonably and ito the law delegated to perform functions of the Board
   - Director reasonably believed-
   a. That the matter fell within the person’s professional or expert competence
   b. That the person merits confidence
5. Relied on the information, recommendation, etc. presented by the persons in 4 above.

Question 29

What is the duty of due diligence (as part of the BJR)?

Answer 29

When acting obo the co, a manager must act

a. in good faith
b. using the same level of care that an ordinarily prudent individual would use in comparable situation
c. in the reasonable belief that the best interests of the co are being met.

Question 30

Discuss the NEGATIVE duties of directors

Answer 30

1. Common law duties:
   a. Duty not to exceed powers
   b. Duty to exercise his powers for a proper purpose
   c. Duty to maintain unfettered discretion
   d. Duty not to compete with the company
   e. Duty to avoid conflict of interest (own v co)
2. A director may not use their position or information obtained as director to-
   - Get an advantage for himself or another person other than the co
   - While knowingly creating harm for co
   - So-called corporate opportunity
   Ito King III certain conflicts of interest are fundamental and should be avoided; others should be disclosed in good time and in full detail to the board and the managed.

Question 31

Discus the duty to disclose information

Answer 31

1. Director should communicate to the Board at the earliest opportunity ANY INFORMATION that comes to his attention, unless:
   a. Immaterial to the co;
   b. Generally available to the public;
   c. Known to other directors;
   d. Bound not to disclose due to legal or ethical obligations
   - Interests in future and existing contracts

Question 32

Discuss the duty to disclose wrt future contracts

Answer 32

Director who has a PERSONAL FINANCIAL INTEREST in a matter to be considered at a meeting (or knows a related person has such interest)-

a. Must disclose the interest and its general nature BEFORE meeting
b. Must provide material information to the meeting
c. May share insights, observations if REQUESTED
d. Must LEAVE the meeting directly after making the disclosure
e. May NOT participate in consideration of the matter

Question 33

Discuss the duty to disclose wrt existing contracts

Answer 33

Director acquires a PERSONAL FINANCIAL INTEREST in an agreement or other matter in which a co has a material interest (or knows a related person has such interest): Must disclose nature and extent of the interest to the Board or shareholders

Question 34

Discuss the duty to disclose wrt effect on contracts

Answer 34

1. VALID if transaction approved by Board, despite the persona financial interest or that of related person
2. Must meet 1 of 3 requirements:
   a. Approved by Board after disclosure;
   b. If not disclosed: Board by ordinary resolution of shareholders
   c. If not disclosed: Declared valid by court
   - If not compliant, these type of contracts are therefore VOID, not voidable

Question 35

Summarise the types of liabilities of directors

Answer 35

1. Common law liability for breach of duties
2. Liabilities for specific actions
3. Other: sec 20, 15, and 218 liabilities

Question 36

Discuss common law liability

Answer 36

Director liable ito common law (for damages and costs incurred) when director breaches his FIDUCIARY DUTY to

a. Disclose personal financial interests
b. Avoid conflict of interests
c. Act in good faith and proper purpose
d. Best interest of the co
- Liable if did not act with required degree of care, skill and diligence.

Question 37

Discuss specific actions iro liability

Answer 37

1. Acted obo co, singing obo, knowing he lacked authority
2. Carry on the business of the co knowing it is prohibite (reckless, gross negligent, intent to defraud)
3. Director was a party to act or omission knowing ir was calculated to defraud creditor, employee, shareholder, or had other fraudulent purpsoes
4. Signed or consented to the publication of financial statements that were false or misleading; prospectus or written statement
5. Director took part in meeting and did not vote against the following:
   a. Issuing of unauthorised shares
   b. Issue authorised securities without shareholder approval
   c. Providing financial assistance to a person in acquisition of securities contrary to liquidity and solvency requirements or MOI
   d. Voted in favour of resolution approving distribution knowing it was contrary to Act
   e. Acquisition of shares contrary to Act
   f. Allotment contrary to Act
   - NB: DESPITE KNOWING

Question 38

Discuss sec 20 liability

Answer 38

• Each shareholder can claim damages against a person (also director) in-
  1. Through fraud or gross negligence of that person, the company does something inconsistent with the Act
  2. A person does something contrary to the limitation, restriction, or qualification by the MOI
• Unless ratified by shareholders

Question 39

Discuss sec 15 liability

Answer 39

• MOI and rules are binding between co and each director or prescribed officer
• Contractual rights of persons apply when directors contravene provisions of MOI
• IF Act does not provide otherwise
• Shareholders, directors, prescribed officers may institute proceedings to restrain co or directors

Question 40

Discuss sec 218 liability

Answer 40

• Any person who contravenes ANY PROVISION of the Act is liable to another person FOR LOSS that a person suffers as a result of contraventions of the Act
• Gross negligence or fraud NOT REQUIRED

Question 41

Discuss ‘indemnification’

Answer 41

1. Director may be indemnified of liability unless MOI provides otherwise and other specific circumstances
   - Co may purchase insurance to protect itself and directs iro MOI
   - A provision in an agreement, MOI, or rules of co, or resolution adopted by a co is VOID if it purports-
   a. Relieve the directro of his duties in ss75 and 76
   b. Relieve a director of his liabilities in s77
   c. Negate, limit or restrict legal consequences from an act or omission that = WILFUL MISCONDUCT OR BREACH OF TRUST
2. No indemnification for-
   a. Acted or purported to act in name of co, despite knowing not allowed to
   b. Liability arose from WILFUL BREACH OF TRUST OR MISCONDUCT on directors’ side
   c. Acting without authority
   d. Fraudulent acts
   e. FINE for contravening any national Act
   f. Reckless trading
   g. Trading in insolvent conditions
3. Unless MOI provides otherwise, the co CAN do-
   a. Advance expenses to defend litigation to the services of director
   b. Indemnify director from litigation expenses if proceedings are abandoned or director is found not liable
   c. Indemnify director from expenses as a result of litigation in cases where director can be indemnified

Question 42

Name 3 types of criminal offences

Answer 42

1. Trading with intent to defraud
2. Misleading or false financial statements
3. Falsifying any accounting document

Question 43

Discuss Public Interest Score

Answer 43

1. Ito the Act, each co must calculate its public interest score at the end of each financial year.
2. Any co which, in any 2 of the previous 5 years, has attained a public interest score over 500 points, is obliged to appoint a social and ethics committee

Question 44

What is determined by the PI Score?

Answer 44

1. Applicable financial reporting standard
2. Ambit and contents of annual returns
3. Appointment of Social and Ethics Committee
4. Size of Co (i.e. small, medium or large for rescue proceedings)

Question 45

How is the score calculated?

Answer 45

By awarding points for-

1. Employees: The number of points for employees equals the average number of employees of the Co during the financial year
2. Third party liability: Unsecured debt - 1 point is allocated for every R1m (or part thereof) in outstanding unsecured debt of the Co held by creditors at the FYE
3. Turnover: 1 point is allocated for every R1m (or part thereof) in turnover during the financial year
4. Points for individuals:
   a. Profit companies: 1 point is allocated for every individual who, at the end of the FY, is a shareholder, or is known by the Co to have a beneficial interest in any of the Co’s issued securities
   b. NPCs: 1 point for every individual who, at the end of the FY, is known by the Co to be a member of the Co, or a member of an association that is a member of the Co

Question 46

What are the 3 levels of interest score?

Answer 46

• 350 points+
• 100 to 349 points
• Below 100

Question 47

Which cos need to be audited regardless of its interest score?

Answer 47

1. Public cos and SOCs

2. Cos with assets of R5m+