The Company Director Checklist. South Africa

Transcription

1 The Company Director Checklist South Africa

2 TABLE OF CONTENTS 1 UNDERSTAND THE CONCEPT OF DIRECTOR, PRESCRIBED OFFICER AND MEMBER OF BOARD COMMITTEE OR AUDIT COMMITTEE 1 2 ENSURE / CONFIRM THAT YOU ARE NOT DISQUALIFIED FROM BEING A DIRECTOR (S 69). 2 3 YOUR CONSENT TO ACT AS A DIRECTOR FAMILIARISE YOURSELF WITH KING III.4 5 FAMILIARISE YOURSELF WITH THE CONSTITUTIONAL DOCUMENTS OF THE COMPANY 5 6 CONSULT THE COMPANY S SPONSOR AND FAMILIARISE YOURSELF WITH THE JSE LR RELATING TO DIRECTORS (JSE LR 2.9).7 7 TO WHOM ARE YOUR DUTIES OWED? (S 76) WHAT IS THE DUTY OF CARE, SKILL AND DILIGENCE? (S 76(3))..9 9 WHAT IS THE BUSINESS JUDGEMENT RULE? (S 76(4)) HOW MUCH CAN YOU DELEGATE TO, AND RELY ON, OTHERS? (SS 72, 76) WHAT IS THE POSITION ON PERSONAL FINANCIAL INTERESTS? (S 75) WHAT ARE THE RULES RELATING TO CONFLICTS OF INTEREST AND DISCLOSURE OF INFORMATION TO THE BOARD? (S 76, JSE LR 4.9) WHAT ARE YOUR OTHER KEY DUTIES UNDER THE COMPANIES ACT? (SS 22, 76) UNDERSTAND THAT TURNING A BLIND EYE MAY NOT BE ENOUGH UNDERSTAND YOUR DUTIES AND LIABILITIES IN TERMS OF CORPORATE FINANCE / CORPORATE CAPITAL TRANSACTIONS UNDERSTANDING YOUR DISCLOSURE OBLIGATIONS AS A DIRECTOR OF A LISTED COMPANY (LR 3.36) UNDERSTANDING WHAT THE COMPANY MUST DO TO COMPLY WITH ITS STATUTORY OBLIGATIONS UNDERSTAND YOUR POTENTIAL LIABILITY UNDER OTHER ACTS AND THE SYSTEMS ADOPTED BY YOUR COMPANY TO MINIMISE BREACHES WHAT IS THE POSITION IF THE COMPANY MAY BE INSOLVENT? (S 22) WHAT SPECIAL RESPONSIBILITIES AND LIABILITIES ARE ASSOCIATED WITH A PUBLIC OFFER OF SHARES? WHAT SPECIAL RESPONSIBILITIES AND LIABILITIES ARE ASSOCIATED WITH A TAKEOVER? (S 126 & TAKEOVER REGULATIONS) WHAT SPECIAL RESPONSIBILITIES AND LIABILITIES ARE ASSOCIATED WITH A JOINT VENTURE? INDEMNITIES AND INSURANCE (S 78)..29

3 24 HOW DO I RESIGN?...30 INTRODUCTION This Company Director Checklist has been designed as a practical guide to the main obligations and procedures of a listed public company under the Companies Act, No. 71 of 2008 (as amended by the Companies Amendment Act, No. 3 of 2011, and the Financial Markets Act) (Companies Act) and the Listings Requirements of the Johannesburg Stock Exchange Limited (JSE LR). The Companies Act came into force on 1 May 2011 and introduced a significant new chapter in South African company law. The new legislation has introduced a host of novel concepts in South African company law and has codified high standards of corporate governance and accountability. Many concepts in the Companies Act are yet to be interpreted by the courts, however there have since been a number of cases decided which have dealt with corporate governance and directors' duties under the new Companies Act which assist in the interpretation of these provisions. This Checklist is a general guide that is not intended to be a substitute for professional advice. It will, however, highlight to a company director those situations where professional advice may be required. This checklist was updated in February 2014.

4 1 ACTION / ISSUE COMMENT / NOTES BEFORE APPOINTMENT 1 UNDERSTAND THE CONCEPT OF DIRECTOR, PRESCRIBED OFFICER AND MEMBER OF This checklist is relevant to you not only if you are appointed as a director, but also if you are a prescribed officer of the company Per Regulation No. 38 of the Companies Regulations, 2011, a prescribed officer means any person who: BOARD COMMITTEE OR AUDIT COMMITTEE or a member of a board committee or the audit committee, even if you are not a director. exercises general executive control over and management of the whole, or a significant portion, of the business and activities of the For the most part, the duties, responsibilities company; or and liabilities imposed on directors also apply to prescribed officers and members of board committees or audit committees. The grounds for disqualification from being a director also apply to prescribed officers and members of such committees. regularly participates to a material degree in the exercise of general executive control over and management of the whole, or a significant portion, of the business and activities of the company. Accordingly, senior managers and executives are treated in much the same This is irrespective of any particular title given by the company to an office held by you in the company or

5 ACTION / ISSUE way as directors under the Companies Act (but not the JSE LR). COMMENT / NOTES the function performed by you for the company. Understand that even though you may not be appointed to the board, your role and responsibilities within the company may subject you to the same duties, responsibilities and liabilities as those of a director. 2 ENSURE / CONFIRM THAT YOU The law does not prescribe qualifications for Some disqualifications lapse after a certain period of ARE NOT DISQUALIFIED FROM being a director. Instead, it sets out grounds time. BEING A DIRECTOR (COMPANIES ACT SECTION 69) for disqualification and ineligibility. You are disqualified from serving as a If you serve as director whilst being disqualified from doing so in terms of Section 69 of the Companies director if you: Act, you may be faced with an application to be o are an unrehabilitated insolvent; or declared a delinquent, in which case you may be disqualified from acting as a director of any company o are prohibited in terms of any public regulation to be a director of a company; or for a lifetime (see Companies Act Section 162(6)). Certain other penalties may be meted out by court on delinquent directors. o have been removed from an office of It is irrelevant in which jurisdiction such disqualifying

6 ACTION / ISSUE trust, on grounds of misconduct involving dishonesty; or COMMENT / NOTES offences were committed or prosecuted. o o o have been convicted and imprisoned without the option of a fine, or fined more than R 1000, for theft, fraud, forgery or perjury; or have been convicted and imprisoned without the option of a fine, or fined more than R 1000, for an offence involving fraud, misrepresentation or dishonesty or in connection with the promotion, formation or management of a company; or have been convicted and imprisoned without the option of a fine, or fined more than R 1000, for an offence under the Companies Act, Insolvency Act, Close Corporations Act, Competition Act, Financial Intelligence Centre Act, the Financial

7 ACTION / ISSUE COMMENT / NOTES Markets Act or Chapter 2 of the Prevention and Combating of Corrupt Activities Act. 3 YOUR CONSENT TO ACT AS A DIRECTOR In order to be entitled to serve as a director, you must deliver to the company (normally to the company secretary) a consent form to act as a director. This requirement is contained in Section 66(7)(b) of the Companies Act. 4 FAMILIARISE YOURSELF WITH The King Report on Governance for South The King III Report and Code are available at KING III Africa, 2009 (King III), is a code the website of the Institute of Directors of recommending best corporate governance Southern Africa (IoDSA): practices in South Africa. It applies to all entities. There are numerous practice notes published pursuant to King III, also available Whilst it is not binding as law, the JSE does at IoDSA s website. expect listed companies to comply with its provisions and to make disclosures in their annual reports regarding their compliance with King III, amongst other things. King III must be applied holistically. A company cannot pick and choose which elements of King III it wishes to apply. King III deals with a host of matters relating It should be noted that recently the Banks Amendment Act has amended banking

8 ACTION / ISSUE COMMENT / NOTES to good corporate governance and processes, composition of boards and committees, the management of risk in the company and various other matters. Sustainability is a key aspects addressed in King III. legislation substantially to, amongst other things, incorporate certain of the provisions of King III into banking law. Accordingly, companies that are banking institutions in South Africa must comply with these provisions. King III deals extensively with the distinction between executive, non-executive and independent directors, and on which committees such directors may serve. Understand the category into which you fall and your role on the board. It is important for directors of listed companies to have a working knowledge of the recommendations in King III. Further, the JSE has also released a directive / guidance letter concerning which provisions of King III are mandatory for listed companies. Listed companies must therefore comply with the mandatory provisions. Otherwise they may be censured by the JSE. 5 FAMILIARISE YOURSELF WITH THE CONSTITUTIONAL DOCUMENTS OF THE COMPANY Peruse and understand the following documents of the company: Memorandum of Incorporation; Any shareholder may have a claim for damages against you if you, due to gross negligence, cause the company to do anything inconsistent with its Memorandum of Incorporation.

9 ACTION / ISSUE COMMENT / NOTES Board charters; Delegation of authority frameworks, if any. Understand what your powers, duties and limitations are in terms of the constitutional documents of the company. When performing any act or function on behalf of the company, ensure that you have the requisite authority to do so and that the matter has been channelled through all the correct structures within the company. Ensure that you are duly authorised to act in terms of an authorising resolution of the appropriate organ of the company. You may incur personal liability to the company for damages or loss if you act, or enter into a transaction on behalf of the company, without the proper authority to do so (Companies Act Section 77(3)(a)). The Companies Act views such conduct in a very serious light and the company may not, in law, indemnify you or effect insurance to protect you against such liability to the company (ie. liability resulting from unauthorised acts). Seek advice if you are not sure about this.

10 6 CONSULT THE COMPANY S SPONSOR AND FAMILIARISE YOURSELF WITH THE JSE LR RELATING TO DIRECTORS (JSE LR 2.9) The company s sponsor is the principal advisor to the company with regard to the company s compliance with the JSE LR and the duties of directors in the listed environment. You are bound by and must comply with the JSE LR, as amended from time to time, in your capacity as director, and in your personal capacity. The directors and senior management of a listed company must collectively have appropriate expertise and experience for the governance and management of the company and the group s business (JSE LR 4.8(a)). You are expected to understand what is required of you to enable holders of securities and the public to be able to appraise the position of your company on an ongoing basis and to avoid the creation of a false market in your company s securities once they are listed. If you fail to comply with the JSE LR applicable to you, you may be censured or fined by the JSE. The company s sponsor must be satisfied that you: have completed and submitted the directors declaration as set out in Schedule 21 to the JSE LR; have had explained to you the nature of your responsibilities and obligations arising from the JSE LR.

11 You and the other directors of the company must establish suitable communication procedures that ensure a flow of information to provide a reasonable basis for you and your codirectors to make proper judgements as to the financial position and prospects of your company and its group (see JSE LR 2.10). 7 TO WHOM ARE YOUR DUTIES OWED? (COMPANIES ACT SECTION 76) The fundamental principle is that a director must act in good faith and in the best interests of the company. This is understood in common law to mean in the best interests of the company s shareholders as a whole. This includes future shareholders. Accordingly, a director must also have regard to the long-term interests of the company s shareholders as a whole. You do not have a direct legal duty to act in the interests of other stakeholders of the company, such as employees or the community at large, unless to do so is in the interests of shareholders. This is what is Section 76(3) of the Companies Act has codified the fundamental principle which existed in common law under the previous company law regime: directors duties must be exercised in the best interests of the company. It is worth noting that you may also have duties to the subsidiaries of the company, even though you may not be a director thereof. You must not knowingly cause harm to any subsidiary of the company (see Companies Act Section 76(2)(a)(ii)). King III places great emphasis on the principle that the company must consider the

12 commonly referred to as the enlightened interests of other stakeholders (such as shareholder value approach to directors employees, suppliers, customers, the duties. environment and the community in which the company operates) in advancing shareholder interests. 8 WHAT IS THE DUTY OF CARE, You are, in law, required to act with the degree of This requirement comes from Section 76(3)(c) SKILL AND DILIGENCE? care, skill and diligence that may reasonably be of the Companies Act, and is a (stricter) (COMPANIES ACT SECTION expected of a person: modification of the common law test which 76(3)) carrying out the same functions in relation to the company as those carried out by you; was applied by the courts prior to the enactment of the Companies Act. and It is a two-pronged test: having your general knowledge, skill and experience. Note that executive directors will be held to a higher standard as they are expected to devote more attention to the affairs of the company than non-executive directors. o there is an objective floor which is the minimum degree of care, skill and diligence expected. In this regard, one would consider the size of the company, its nature, and whether a role involves certain technical expertise. One considers what would ordinarily and reasonably be expected from a director in that position; and

13 o a subjective element, which is concerned with the skill set and knowledge of that particular director. If you have certain special skills or qualifications over and above those ordinarily expected from you, you will be held to a higher standard. 9 WHAT IS THE BUSINESS Directors shall have complied with their duty to act This is what is commonly known as the JUDGEMENT RULE? in the best interests of the company and their duty business judgement rule which was adopted (COMPANIES ACT to act with the requisite skill, care and diligence if by the Companies Act from United States law SECTION 76(4)) they: and the law of other jurisdictions. have taken reasonably diligent steps to The purpose of the rule is to protect directors become informed about the matter; and from being held liable, with the benefit of either the directors had no material personal hindsight, for mere errors of judgement. financial interest in the subject matter of the The content of Section 75 of the Companies decision, and had no reasonable basis to Act (disclosure of personal financial interests know that any related person had a and recusal) is dealt with in No. 11 below. personal financial interest in the matter, or the directors complied with the requirements of Section 75 of the Companies Act with respect to the disclosure of any interest and

14 recusal from the meeting of the board; and the directors made a decision, or supported a decision of a committee or the board, with regard to that matter, and the directors had a rational basis for believing, and did believe, that the decision was in the best interests of the company. 10 HOW MUCH CAN YOU DELEGATE TO, AND RELY ON, OTHERS? (COMPANIES ACT SECTIONS 72, 76) Except to the extent that the Memorandum of Incorporation of the company provides otherwise, the board of a company may: o appoint any number of committees of directors; and o delegate to any committee any of the authority of the board. Except to the extent that the Memorandum of Incorporation of a company, or a resolution establishing a committee, provides otherwise, the committee: o may include persons who are not directors of the company, but any Certain matters in the Companies Act specifically refer to the board as being the necessary organ to exercise certain powers or authorise certain actions by the company. For instance it is the board which must be satisfied that the solvency and liquidity test in Section 4 of the Companies Act is satisfied insofar as various corporate finance / corporate capital transactions are concerned (e.g. distributions, share repurchases and certain instances of financial assistance given by the company). Approval for these matters may not be delegated. The board always has ultimate responsibility for the decisions of its committees. The one

15 such person must not be ineligible or disqualified to be a director, and no such person has a vote on a matter to be decided by the committee; and o may consult with or receive advice from any person; and o has the full authority of the board in respect of a matter referred to it. exception to this is that the duties of an audit committee of the company reduce the functions and duties of the board with respect to the appointment, fees and terms of engagement of the auditor of the company (Companies Act Section 94(10)). Note that only public companies and state-owned companies are required to have audit committees. Importantly, however, the creation of a committee, the delegation of any power to a committee or action taken by a committee, does not alone constitute compliance with, or satisfy, the requirements of a director s duty to the company, as set out in Section 76 of the Companies Act (discussed in 7 and 8 above). You may only rely on persons within the company and external advisors if they reasonably merit confidence. Consider whether you are comfortable that the subject matter of the delegation is something which can properly be handled

16 by the persons to whom you delegate (see Companies Act Section 76(5)). 11 WHAT IS THE POSITION ON PERSONAL FINANCIAL INTERESTS? (COMPANIES ACT SECTION 75) If you have a personal financial interest in respect of a matter to be considered at a meeting of the board, or know that a related person has a personal financial interest in the matter, you: must disclose the interest and its general nature before the matter is considered at the meeting; must disclose to the meeting any material information relating to the matter, and known to you; may disclose any observations or pertinent insights relating to the matter if requested to do so by the other directors. You must then leave the meeting immediately after making any disclosure. Further, you must not take part in the consideration of the matter. You must also not execute any document on behalf of the company in relation to the matter unless A personal financial interest means a direct material interest of that person, of a financial, monetary or economic nature, or to which a monetary value may be attributed, but does not include any interest held by a person in a unit trust or collective investment scheme in terms of the Collective Investment Schemes Control Act, 2002 (see Section 1 of the Companies Act), unless that person has direct control over the investment decisions of the fund. Note that it is not only your personal financial interests that are relevant here, but also those of related persons. Related is a legal-technical concept defined in the Companies Act. It means your relatives within two degrees of blood relationship (consanguinity e.g., your parents, grandparents, children, grandchildren, siblings, uncles, aunts) or those related to

17 specifically requested or directed to do so by the board. you within two degrees of marriage (affinity e.g., spouse, in-laws). It also means juristic persons under your control. Seek legal advice if you are uncertain about the application of this concept. Related, for purposes of Section 75, also includes a second company of which you are a director, prescribed officer or committee member. Failure to comply with the disclosure and recusal requirements may lead to the resolution and the transaction being void, and your consequent personal liabilityfor losses, damages or costs sustained by the company or even third parties for noncompliance (Companies Act Sections77, 218(2)). Alternatively, you can give a standing notice which gives details of the nature and extent of your financial interests. You should also check your company s constitution or any shareholder s agreement

18 for specific provisions on disclosure which may be over and above those contained in the Companies Act. 12 WHAT ARE THE RULES RELATING TO CONFLICTS OF INTEREST AND DISCLOSURE OF INFORMATION TO THE BOARD? (COMPANIES ACT SECTION 76, JSE LR 4.9) You must be free of any conflict of interest between your duties to the company and your private interests. You must: not use your position of director, or any information obtained while acting in the capacity of a director, to gain an advantage for yourself, or for another person, other than the company or a wholly-owned subsidiary of the company; and communicate to the board at the earliest practicable opportunity any pertinent information that comes to your attention, unless you reasonably believe that the information is immaterial to the company or is generally available to the public, or known to the other directors. This is essentially a codification of the common law principles that a director shall not make a secret profit from his position as a director and shall not appropriate corporate opportunities. Any secret profits arising pursuant to your office as director must be disgorged and paid over to the company There is an instance in which you may not be compelled to disclose information to the board: if you are bound not to disclose that information by a legal or ethical obligation of confidentiality. A legal obligation of confidentiality would, for instance, include the rules relating to the prohibition of disclosure of inside information, which applies only in respect of listed securities. Seek advice as to whether the insider information provisions in the Financial Markets Act may be relevant to a

19 particular circumstance in which you have become privy to price sensitive information in respect of listed securities. 13 WHAT ARE YOUR OTHER KEY DUTIES UNDER THE COMPANIES ACT? (COMPANIES ACT SECTIONS 22, 76) You must exercise your powers and discharge your duties: in good faith in the best interests of the company; and for a proper purpose. You must not knowingly cause harm to the company or a subsidiary of the company. The company is required to prepare and lodge annual financial statements with the Companies and Intellectual Property Commission (CIPC), and you must ensure that your company complies with its statutory disclosure obligations. All companies must lodge annual returns with the CIPC. Failure to do so may cause the company to be de-registered. You may be civilly liable for a breach of your duties and for any loss or damage arising from your breach. You may also be criminally liable if you acquiesced in the company trading under grossly negligent or fraudulent circumstances, or if you made misleading or untrue statements in the financial statements of the company. Section 77 of the Companies Act is a very critical section dealing with personal liability of a director for loss or damages suffered by the company as a result of contraventions of the Companies Act.

20 14 UNDERSTAND THAT TURNING In many instances in the Companies Act, Always act reasonably and honestly in A BLIND EYE MAY NOT BE you will be held liable if you knowingly carrying out your functions as director. If you ENOUGH committed a wrong or omitted to act in a have done so, you may avail yourself of an manner expected of you. application to court to exempt you from Knowingly, for purposes of the Companies Act, does not only refer to actual subjective knowledge, but includes instances where liability for breach of duty. The court has discretion in this regard (Section 77(9) and (10) of the Companies Act). you should reasonably have known of the You may rely on others within the company, matters at hand. For example, if you were in as well as external advisors, but only if your a position where you ought to have: reliance is reasonable and such persons o investigated the matter to an extent that would have provided you with actual knowledge; or merit confidence. You have to be comfortable that the persons providing you with information or advice in respect of the company are competent and reliable. o taken other measures which, if taken, would reasonably be expected to have provided you with actual knowledge of the matter, you would have acted knowingly.

21 15 UNDERSTAND YOUR DUTIES The Companies Act has abolished the old Section 77 of the Companies Act deals AND LIABILITY IN TERMS OF capital maintenance rules under the previous extensively with personal liability to the CORPORATE FINANCE / law, and has replaced that with the solvency company resulting from unauthorised CORPORATE CAPITAL and liquidity test. distributions, financial assistance and the TRANSACTIONS Distributions and share repurchases must like. comply with the solvency and liquidity test The solvency and liquidity test in Section 4 of set out in Section 4 of the Companies Act. the Companies Act requires you to take into You must be aware that there are several restrictions on the company providing financial assistance to directors, prescribed officers, related and inter-related parties and to shareholders of related or inter-related account all reasonably foreseeable and contingent liabilities and assets of the company. The board ought to seek expert advice with respect to the application of this test. parties. Such financial assistance must be Your liability to the company is joint and sanctioned by the shareholders, comply with several with any other director who solvency and liquidity, and be fair and participated in the meeting and failed to vote reasonable to the company (Section 45 of against the decision. Thus, you could be the Companies Act). faced with a claim for the full amount of any Always make sure that you are well informed as to the financial status of the company as well as to whether all necessary approvals damages suffered by the company, and left with the option to pursue a contribution from the other directors. have been or shall be obtained before and during your participation in a board meeting

22 where such matters are to be considered. You must vote against any proposed resolution which is in contravention of the rules pertaining to corporate finance / corporate capital transactions involving the company, in order to avoid personal liability. Mere abstention will not absolve you of liability. 16 UNDERSTANDING YOUR A listed company is required to announce As part of the listing of a company, numerous DISCLOSURE OBLIGATIONS any dealings in its securities by its directors. details in respect of the company s directors AS A DIRECTOR OF A LISTED COMPANY (JSE LR 3.63) If you (or any associate of yours) deal in securities relating to an issuer of which you and management must be disclosed in the pre-listing statement (see JSE LR 7.B). are a director, you must disclose the The financial statements of the company required information to the issuer without must also disclose numerous details delay, and in any event, no later than 24 regarding your remuneration, loans made to hours after dealing. you by the company and interests you have Be very wary of the prohibitions on insider in the securities of the company. trading. You may not deal in any securities relating to an issuer of which you are a director without

23 first advising the chairman of the company in advance and receiving clearance from him/ her. Seek advice (either from your sponsor or legal advisor) with regard to the prohibitions contained in the JSE LR on trading in your company s securities during certain closed periods (see JSE LR 3.67 and 3.69). 17 UNDERSTANDING WHAT THE COMPANY MUST DO TO COMPLY WITH ITS STATUTORY OBLIGATIONS A company must keep the following records at its registered office or such other location as notified to the CIPC: a copy of its Memorandum of Incorporation, and any amendments or alterations to it, and any rules of the company made by the board in terms of Section 15 (3) - (5) of the Companies Act; a record of its directors for the past seven years; The public company must also hold annual general meetings per the Companies Act, and present certain information to shareholders at such meetings. A public company must file its annual financial statements, together with its annual return, with the CIPC. In terms of the JSE LR, the company must prepare and distribute interim, semi-annual financial statements. reports presented at the annual general meeting of the company, for a period of The content of financial statements is regulated extensively by the Companies Act.

24 seven years after the date of any such meeting; annual financial statements required by the Companies Act, for seven years after the date on which each such particular statements was issued; accounting records required by the Companies Act for the current financial year and for the previous seven completed financial years of the company; Public companies must also have whistleblower systems in place (Companies Act Section 159) to facilitate protected disclosures in relation to contraventions of the Companies Act and other legislation. One of the company secretary s principal duties is to guide and inform you with respect to the company s compliance obligations. You should consult him / her in this regard at every reasonable opportunity. notice and minutes of all shareholders meetings; copies of any written communications sent generally by the company to all holders of any class of the company s securities, for a period of seven years after the date on which each such communication was issued; minutes of all meetings and resolutions of directors, or directors committees, or the audit committee, if any, for a period of seven years;

25 a securities register; records required in relation to company secretaries and auditors. 18 UNDERSTAND YOUR POTENTIAL LIABILITY UNDER OTHER ACTS,AND THE SYSTEMS ADOPTED BY YOUR COMPANY TO MINIMISE BREACHES Tax In general, directors cannot be held personally liable for tax due by their company. There are two exceptions: (i) The Value-Added Tax Act imposes personal liability on a director of a company-vendor who controls or is regularly involved in the management of the company s overall financial affairs. Should the company fail to pay VAT, this person may be held liable; (ii) The Income Tax Act provides for personal liability in respect of unremitted instalments of employee tax. Again, personal liability is imposed on the person who controls or is regularly involved in the management of the company s overall financial affairs. Environmental The National Environmental Management Act (NEMA) makes a director liable for an offence A very good exposition of directors potential personal liability under various laws is set out in an article by Professor Kathleen van der Linde, Personal Liability of Directors for Corporate Fault, 20 SA Mercantile Law Journal, 2008, p439, which forms the basis of this summary. In some instances, the liability is strict (ie. it is irrelevant whether you were negligent or not). In other instances, you will have a valid defence if you acted reasonably. There are several laws and regulations in South Africa dealing with competition (antitrust).there are several penalties and fines which may be imposed on dominant firms that engage in uncompetitive practices within their industry. A pending amendment to the

26 committed by the company if the offence resulted from the failure of the director to take all reasonable steps that were necessary in the circumstances to prevent the commission of the offence. Both the company and the director may be convicted. Directors can escape liability by proving that they took all reasonable steps to prevent the commission of the offence. NEMA imposes criminal and civil liability. In addition to a fine or imprisonment, the court may award compensation or punitive damages where the convicted director gained or stood to gain financially from the commission of the offence. competition laws seeks to impose personal civil and criminal liability on directors who are party to the anti-competitive conduct of their company. Social Security Law In terms of the Unemployment Insurance Contributions Act, employers must withhold and pay over contributions for their employees. Every director who controls or is regularly involved in the management of the company s overall financial affairs is personally liable for any amount withheld but not paid over.

27 Money-Laundering Legislation Institutions performing financial services have an obligation to report suspicious transactions to the Financial Intelligence Centre, pursuant to the Financial Intelligence Centre Act. You may be convicted of an offence if you fail to report suspicious transactions. You could escape liability if you have complied with the internal reporting rules of your institution. Insider Trading / Market Abuse The Financial Markets Act contains provisions under which you may be civilly and/or criminally liable for trading in shares as an insider or disclosing inside information to third parties. There are also market abuse / market manipulation prohibitions. SPECIAL CIRCUMSTANCES 19 WHAT IS THE POSITION IF THE COMPANY MAY BE INSOLVENT? (COMPANIES ACT SECTION 22) If the CIPC has reasonable grounds to believe that a company is unable to pay its debts as they become due and payable in the normal course of business, the CIPC You must also take heed of the business rescue provisions contained in Chapter 6 of the Companies Act.

28 may issue a notice to the company to show cause why the company should be permitted to continue carrying on its business, or to trade. If a company to whom a notice has been sent fails to satisfy the CIPC that it is able to pay its debts as they become due and payable in the normal course of business, the CIPC may issue a compliance notice to the company requiring it to cease carrying on its business or trading. You may be personally liable to the company for any loss, damages or costs suffered by the company as a result of acquiescing in the company s trading in contravention of Section 22 of the Companies Act. Case law has indicated that directors also may be held personally liable to third parties under Section 22, even though the section imposes obligations on the company and not specifically directly on directors. In terms of the business rescue procedures, any affected person (shareholder, creditor, employee trade union) may apply to court to place the company under business rescue (similar to administration or judicial management) if the company is financially distressed, if the company has failed to pay over amounts to the authorities in respect of employment related matters, or if it is otherwise just and equitable for financial reasons to place the company under business rescue. The company may also voluntarily place itself under business rescue through a board resolution to this effect If the board of a company has reasonable grounds to believe that the company is financially distressed, but the board has not adopted a resolution placing the company under business rescue, the board must deliver a written notice to each affected person stating its reasons for not adopting a

29 resolution placing the company under business rescue If the company is placed in liquidation, a court has a wide discretion to impose personal liability on you for the debts of the company if you were party to any reckless or fraudulent trading prior to liquidation. 20 WHAT SPECIAL RESPONSIBILITIES AND LIABILITIES ARE ASSOCIATED WITH A PUBLIC OFFER OF SHARES? Public offers of securities are regulated extensively by Chapter 4 of the Companies Act. The offer of listed securities is regulated by the JSE LR. A prospectus issued by a company must be signed by every director. You may be liable if the prospectus for the public offer does not contain all information investors and their advisers reasonably require to make an informed assessment as to the rights and liabilities attaching to the securities offered and of the company s assets and liabilities, profits and losses, financial position and performance and prospects. You must peruse and consider,

30 and seek advice to understand, the contents of the prospectus or pre-listing statement. TAKEOVERS AND JOINT VENTURES 21 WHAT SPECIAL Takeovers of public companies are regulated There is a requirement that the target RESPONSIBILITIES AND by the Takeover Regulation Panel (TRP). company must establish an independent LIABILITIES ARE ASSOCIATED WITH A TAKEOVER? (COMPANIES ACT SECTION 126 AND TAKEOVER REGULATIONS) As director of the offeree company (the target company in relation to a takeover bid), you must act in the best interests of the shareholders of the company as a whole. There is a general duty not to frustrate the offer. It is up to the shareholders whether they wish to accept the offer. board to deliberate on the offer. If you have any interest on respect of the takeover bid, you may not form part of the independent board and you must recuse yourself from all and any deliberations or meetings of the board in relation to the takeover. Pursuant to Section 126 of the Companies You will considered to be non-independent if: Act, during a takeover, as well as when one o you hold unvested securities or is imminent, the board must not, without options, and are offered any approval of shareholders and the TRP: substitute or option scheme, separate o take any action in relation to the affairs of the company that could offer or acceleration of vesting periods that would give rise to a benefit in terms of an offer; or

31 o o effectively result in a bona fide offer being frustrated, or the shareholders being denied an opportunity to decide on the merits; issue any authorised but unissued securities; issue or grant options in respect of any unissued securities; o you are partial to the outcome of an offer because of an increased or decreased future benefit or loss of office or employment. If you are a member of the boards of both an offeror and an offeree regulated company, you are presumed to be conflicted and nonindependent. o authorise or issue, or permit the authorisation or issue of, any securities carrying rights of conversion into or subscription for other securities; It is always prudent to seek legal advice on your duties and responsibilities as a director of a company that is the subject of a takeover. o sell, dispose of or acquire, or agree to sell, dispose of or acquire, assets of a material amount except in the ordinary course of business; o enter into contracts otherwise than in the ordinary course of business; or o make a distribution that is abnormal

32 as to timing and amount. 22 WHAT SPECIAL RESPONSIBILITIES AND LIABILITIES ARE ASSOCIATED WITH A JOINT VENTURE? Even in a joint venture company you have a duty to act in the best interests of the company as a whole. You: must not represent particular sectional interests, such as the shareholder who appointed you to the board; must not be accountable to any interest group, such as a nominating shareholder or union. Nominee directors often find themselves with a conflict of interest where the interests of the company may not be aligned with the interests of a particular shareholder that appointed the director. In such instances, be wary of your obligations regarding disclosure of personal financial interests (your own, as well as those of related persons) and recusal at board meetings of the joint venture company (Section 75 of the Companies Act; see 11 above). SELF DEFENCE 23 INDEMNITIES AND INSURANCE (COMPANIES ACT SECTION 78) The company is entitled, but not obliged, to indemnify you for breach of duty or negligence. This is a matter which would have to be negotiated with the company. A company can also take out insurance which covers you, but is not obliged to do so. Under the previous Companies Act, 1973 (which was replaced by the revised Companies Act on 1 May, 2011), a company could not indemnify its directors or insure them in respect of liability of the directors to the company. Section 78 of the 2011 Companies Act has considerably amended this point.

33 A company cannot pay on your behalf any fine to which you have been sentenced pursuant to a conviction (there are narrow exceptions to this). If the company is not prepared to indemnify you or obtain such insurance, you may have to acquire such insurance in your own name and pay the premiums. There are still matters in respect of which no indemnity or insurance may be given by the company, for instance, serious or wilful misconduct or derelictions of duty. Directors will remain exposed in these instances. A court may also absolve a director from liability to the company if: (i) the director acted honestly and reasonably (and not wilfully); and (ii) it is just in the circumstances to relieve the director of liability. 24 HOW DO I RESIGN? Review the requirements in the constitution. Otherwise, deliver your resignation in writing to the company. Your resignation will be effective at the end of the day stated in the resignation or, if none, the day notice is given. It does not need to be accepted and cannot be rejected. Note, however, that the courts have held that a resignation of all directors en masse would amount to a breach of fiduciary duties.