Being a director of a company in South Africa entails certain obligations. Many people will have heard of the fiduciary duties owed by directors, but not everyone has a fundamental understanding of what these duties entail. Failure by a director to comply with these duties could entail serious consequences. It is accordingly important that every director has a basic grasp of these issues. What, however, do these duties involve and what are some of the basic concepts that directors in South Africa have to be aware of?
South African law on director duties emanates from the common-law and from legislation. Not all of these can be discussed in detail here, but the focus will be on some of the key duties. The Companies Act 71 of 2008 (“Act”) prescribes several important responsibilities of directors. Section 76(3)(a) and (b) of the Act requires that a director must exercise the powers and perform the functions of a director in good faith, for a proper purpose, and in the best interests of the company. This raises the question, however, of how to determine whether a director acted in good faith. In summary, it requires the application of a subjective test. A subjective test, in essence, means looking at the director’s intention, which can be determined by looking at several factors, such as his or her conduct.
Section 76(2)(a) of the Act is also important. It requires that a director must not use his or her position or information obtained from that position to gain an advantage other than for the company (or a wholly-owned subsidiary of the company), or knowingly to cause harm to the company (or a subsidiary of the company). Subject to certain exceptions, a director must communicate pertinent information that comes to the director’s attention to the board as soon as possible.
Section 76(3)(c) of the Act requires, in summary, that a director must act with a requisite degree of care, skill and diligence when exercising his or her powers and functions. What can reasonably be expected of a director will depend on several factors. Of particular significance, is to have regard to what kind of functions the director performs and what kind of general knowledge, skill and experience the director has.
Some of the common-law duties should also be mentioned, since not all of these duties are expressly stated in the Act. They include, but are not limited to, the duty not to appropriate for his or her own benefit, opportunities that rightfully belong to the company, and the duty not to compete improperly with the company.
A director who has been found to be in breach of these obligations can, to name but one example, be held liable to the company for any loss or damaged caused by that breach.
Considering all of this, it may be quite daunting for a person to take on the role of a director. What softens this, at least a bit, is what is known as “the business judgement rule”, which is codified in section 76(4) of the Act. The rule, in essence, states that directors will be deemed to have complied with their duties to act in the best interests of the company and with the required degree of care, skill, and diligence if they have taken reasonable and diligent steps to inform themselves about the matter and (in the case of a decision) they can show a rational basis for believing, and did believe, that the decision was in the best interests of the company. Whilst this is helpful to honest directors, it does not apply to, for example, intentional and reckless conduct.
Another useful source when considering director duties are the King Reports. Although that is the subject of another discussion.
In conclusion, there are several aspects and nuances to consider when evaluating director duties. Having at least a basic understanding of these responsibilities is a necessity for any director.
Disclaimer: the information contained in this article is made available for general purposes only. It does not constitute legal advice. It is also subject to change depending on, amongst other things, legal developments. Accordingly, we do not accept responsibility for any loss or damage (whether direct, consequential or otherwise) which may arise from reliance on the information.