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On being a Director of a Private Company

25.03.2021
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Private companies in South Africa are governed by the Companies Act 71 of 2008 (“the Act“) which requires them to have at least one director. Sections 66 to 78 of the Act relates to directors. If you are about to become a director, or are currently one, I recommend familiarising yourself with these provisions. Until then, we will try to cover some of the basics here.

If any of the terms here are unfamiliar to you, consider reading some of our other articles and/or watching some of our videos. Alternatively, please feel free to contact us with your queries.

The Director’s Primary Role

The Act states that the business affairs of a private company must be managed by or under the direction of its board (i.e. the directors). Therefore, it is the directors of the company and not the shareholders who run the company. In general, it is the directors who hold the authority to exercise all the powers and exercise any of the functions of the company. However, there are exceptions to this which can be expressly stated in the company’s Memorandum of Incorporation (“the MOI“) in accordance with the Act.

When an MOI has been drafted to be tailored to the needs of its company, it may provide further clarity to the roles and responsibilities of the director. We always advise our clients, whether at the pre-incorporation stage or post-incorporation, to consider the variety of ways the MOI can be drafted or amended to empower and/or limit the roles and responsibilities of the director. Luckily the common law and the Act have established a list of universally accepted directors’ duties. These “default” duties will always apply to directors of a private company. The emphasis on the accountability and responsibility placed on directors is one of the hallmark features of the Act.

Fiduciary Duties of the Director

The roles and responsibilities of directors of private companies have developed over time in our common law. The Act has expanded those contained in the common law. These include acting in good faith and in the best interest of the company. These particular directors’ duties are often referred to as the “fiduciary duties”. These fiduciary duties are as follows:

  1. to maintain independent and unfettered discretion;
  2. to exercise her/his powers with a proper purpose;
  3. not to exceed her/his powers; and
  4. to avoid conflicts of interest between the director and the company.

It is important for future and current directors to understand these duties. Shareholders should be familiar with these duties so as to better hold their directors accountable.

Practical Application of Duties

  1. Independent Discretion – As a director you are expected to exercise your own judgement. This does not mean you cannot rely on the opinions if others i.e. accountants or lawyers. However, it does mean that you must apply your own judgement despite sometimes relying on the opinions of others whenever making a company decision.
  2. Proper Purpose of the Powers – Directors must exercise their powers with a proper purpose. This requires an understanding of the powers given to them in the Act and the MOI. This extends to understanding the intentions behind the words in both the Act and MOI.
  3. Limitation of Powers – As previously stated the Act expressly sets out the director’s powers. It is their duty to ensure that their actions do not exceed those as set out in the Act as well as those, when applicable, altered in the MOI.
  4. Conflicts of Interest – Situations where a director may be in conflict of the interest’s of the company can arise from a variety of circumstances. For example if a director sits on the board or is a shareholder in a competing company there may be a conflict. If a director takes a business opportunity which was turned down by the company then a conflict of interest may arise. To make things more complicated even the actions of a related person (family members, spouses, etc.) may cause a conflict of interest for directors.

It is advisable to seek legal guidance if you are in doubt regarding whether your actions as a director or your directors’ actions comply with their fiduciary duties. There are various methods available to Directors to remedy a breach of these duties.

How to Remedy a Breach

Breaches of the duties may result in financial losses to the company, personal liability of the directors, related damages claims, interference by the court regarding the running of the company, invalid company decisions, etc. Directors have limited methods to remedy these breaches. Some of those remedies include the following.

  1. If the breach arose due to the failure of the director to seek shareholder approval, then the shareholders may pass a resolution ratifying the decision of the director retroactively.
  2. Similarly, if a decision required approval from the board then the board may pass a resolution ratifying the decision of the director retroactively.
  3. The company may, if applicable in the circumstances, indemnify the director of any loss incurred by their actions. The company is not obligated to indemnify the director and is expressly prohibited from indemnifying the director in certain instances
  4. Most companies should have insurance for the benefit of its directors which may assist in remedying the directors’ breach of their duties. The terms of these policies may vary but generally this insurance will cover directors’ breaches including negligence. It is standard for these policies to exclude claims arising from criminal behavior and actions of dishonesty.
  5. A court may grant relief condoning actions of the director if they acted honestly and reasonably in the circumstances.

This was brief overview of the roles and responsibilities of the director when it comes to their fiduciary duties. Legalese is happy to assist in navigating through the relevant company laws to better optimise how your company is run. We can provide guidance on how best to comply with the directors’ duties or, when necessary, how to enforce the directors’ duties.

Christian Tabor-Raeside – 25 March 2021

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