Faculty of Law

Prescribed reading
• Directors and officers
- Study sections 66 – 78, 84-89, 94 and 162 of the Companies Act
- Study regulations 23, 38, 39, 42 and 43
- Study the following chapters from Davis et al:
 Study Davis et al Chapter 6: Directors and Board
Committees
 Chapter 14: Remedies, Enforcement agencies and alternative
dispute resolution (specifically delinquency and probation
s162)
- Cases prescribed on Moodle
- Prescribed extracts from King 3 and 4 on Corporate Governance
 Who are directors?
 Definition (S1): “director’’ means a member of the board of a company,
as contemplated in section 66, or an alternate director of a company and
includes any person occupying the position of a director or alternate
director, by whatever name designated;
• Person who occupies position of director is a director for purposes of the
act, despite any description or title the company gives to the position
• Person must however be appointed by persons who have the authority to
appoint directors
• De facto director: person who has been appointed as a director but there
is some defect or irregularity in the appointment
• Cannot avoid duties and responsibilities as a director by giving a person
a title other than director
 Who are directors?
 Directors duties and liabilities – applies to directors, alternate director,
prescribed officer and member of a board committee
 Meaning of expression ‘position of director’ position that is occupied by a
person in whom the powers to manage the company rests in terms of
provisions of MoI and the act
 Distinguish between executive and non-executive directors
• Executive directors have a full time contract of employment with the
company
• Non-Executive directors do not have a contract of employment with the
company and merely attends board and committee meetings
- Non-executive directors can be independent or not-independent
 Independent non-executive directors
 Not in act but in King IV on corporate governance
 To be independent a person must:
• Not be a significant provider of financial capital of the company or employed
by a significant supplier of financial capital to the company
• Not participate in a share-based incentive scheme offered by the company
• Not own securities in the company, the value of which is material to the
personal wealth of the director
• Not been employed by the company in an executive position in the last three
financial years
• Not the designated external auditor appointed to complete annual audit of the
company
• Not be a significant or ongoing professional advisor to the company
 Independent non-executive directors
 Not be a member of the executive management of a significant customer or
supplier to the company
 Not be a member of the board of a related company
 Not be entitled to remuneration based on the performance of the company
R38. Prescribed officers
“prescribed officer” is a person that––
(a) exercises general executive control over and management
of the whole, or a significant portion, of the business and
activities of the company; or
(b) 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.
This regulation irrespective of any particular title given by the
company to––
(a) an office held by the person in the company; or
(b) a function performed by the person for the company.
 Prescribed officer
 Examples of prescribed officers:
• Company secretary is the chief administrative officer of the company
• Shadow director: person who is not validly appointed as a director, but the
board of directors normally acts in accordance with the instructions and
directions of such a person
- Shadow directors influence major decisions in the company
 S66 -Board, directors and prescribed officers

The business and affairs of a company must be

managed by or under the direction of its board, which
has the authority to exercise all the powers and perform
any of the functions of the company, except to the
extent that this Act or the company’s Memorandum of
Incorporation provides otherwise.
 S66 -Board, directors and prescribed officers
 Section 66 places a positive obligation on the board of directors to manage the
company
 Board acts collectively as a unit
 Board does have the right to delegate
 Power to manage business and affairs of company is two-fold:
• This is an original power and not a delegated power
• Ultimate power in company is now with board and not with shareholders
• Board is now the company – where act requires the company to take certain
actions, it is the board that must take those actions, not the shareholders in
the general meeting.
• Board can contract on behalf of company, does not need authority of
shareholders
 S66 -Board, directors and prescribed officers
 Board may delegate authority (refer to PowerPoint presentation on section 20)
 May delegate authority to any person or a director of a committee of directors
• Where it delegates to a person, person does not have to be to a director
 When the board delegates authority it must do so in writing
 “under direction of the board” – board does not have to attend to the daily
running of the company
 Board has an oversight function
 Individual director has no authority to act for the company unless she has been
expressly authorised to do so.
 S66 (2) - Board, directors and prescribed officers
(Pty) Ltd – at least 1 director
Ltd – At least 3
MOI may specify a higher number
Where company must appoint an audit and social and ethics committee, then
board must be bigger – public companies at least 6 directors (refer to
composition of audit and social and ethics committees)
Any failure to have the minimum number of directors does not invalidate
anything done by the board
 S66 - Board, directors and prescribed officers

A company’s MOI—
(a) may provide for—
(i) the direct appointment and removal of one or more directors by
any person who is named in, or determined in terms of, the
Memorandum of Incorporation;
(ii) a person to be an ex offıcio director of the company as a
consequence of that person holding some other office, title, designation or
similar status; or
(iii) the appointment or election of one or more persons as alternate
directors of the company; and
(b) in the case of a profit company other than a state-owned company,
must provide for the election by shareholders of at least 50% of the
directors, and 50% of any alternate directors.
 S66 - Board, directors and prescribed officers
 Ex officio director – has same functions, duties, power and liabilities as other
directors
 Person may not serve or continue to serve as an ex offıcio director of a
company if that person is or becomes ineligible or disqualified
 Alternate director – a person who will attend a board meeting when another
director cannot attend
 A director must consent in writing to her appointment
 Can only act as director after providing written consent
 The election or appointment of a person as a director is a nullity if, at the time
of the election or appointment, that person is ineligible or disqualified from
being a director.
S66 - Board, directors and prescribed officers
Director’s Remuneration
(8) Except to the extent that the Memorandum of Incorporation of a
company provides otherwise, the company may pay remuneration to its
directors for their service as directors, subject to subsection (9).
 
(9) Remuneration contemplated in subsection (8) may be paid only in
accordance with a special resolution approved by the shareholders within the
previous two years.

The effect of the above is that the shareholder’s have the power to approve or
reject the proposed remuneration of the directors.
 Remuneration of directors
 Services rendered as a director: act does not define services of directors
 Refers to services rendered in the capacity as a director and not in any other
capacity, e.g. employee
S67 - First director or directors
Each incorporator of a company is a first director of the
company
If the number of incorporators of a company is fewer than the
minimum number of directors required for that company in
terms of this Act or the company’s Memorandum of
Incorporation, the board must call a shareholders meeting within
40 business days after incorporation of the company for the
purpose of electing sufficient directors to fill all vacancies on the
board at the time of the election.
Regulation 39 – Notice that a person has become a director must
be filed with CIPC within 10 business days after the appointment
S68 - Election of directors of profit companies

Directors of profit companies are elected by the shareholders that have voting
rights to appoint directors
Term of appointment – indefinite, except if MOI provides for a term of
appointment
Vote to appoint each director must be done separately
Where more than one position is vacant, the shareholders must vote separately to
fill each position
Majority vote (ordinary resolution) for each candidate required for appointment
to be valid.
S68 - Election of directors of profit companies

Unless the Memorandum of Incorporation of a profit

company provides otherwise, the board may appoint a
person who satisfies the requirements for election as a
director to fill any vacancy and serve as a director of
the company on a temporary basis until the vacancy has
been filled by election, and during that period any
person so appointed has all the powers, functions and
duties, and is subject to all the liabilities, of any other
director of the company.
S69 - Ineligibility and disqualification of persons to be director
or prescribed officer
In this section, ‘‘director’’ includes an alternate director, and—
(a) a prescribed officer; or
(b) a person who is a member of a committee of a board of a
company, or of the audit committee of a company, irrespective of whether
the person is also a member of the company’s board.
S69 - Ineligibility and disqualification of persons to be director
or prescribed officer

A person who is ineligible or disqualified, as set out in this section, must not—
(a) be appointed or elected as a director of a company, or consent to
being appointed or elected as a director; or
(b) act as a director of a company.

A company must not knowingly permit an ineligible or disqualified person to

serve or act as a director.
S69 - Ineligibility and disqualification of persons to be director
or prescribed officer

A person who becomes ineligible or disqualified while serving as a director of a

company ceases to be entitled to continue to act as a director immediately,
subject to section 70(2).
S69 - Ineligibility and disqualification of persons to be director
or prescribed officer

A person who has been placed under probation by a court in terms of section
162, or in terms of section 47 of the Close Corporations Act, 1984 (Act No. 69
of 1984), must not serve as a director except to the extent permitted by the order
of probation.
S69 - Ineligibility and disqualification of persons to be director
or prescribed officer

In addition to the provisions of this section, the Memorandum of

Incorporation of a company may impose—
(a) additional grounds of ineligibility or disqualification of directors; or
(b) minimum qualifications to be met by directors of that company.

Companies often require that to be a director someone should own

a certain amount of shares – this make the director a direct
stakeholder in the welfare of the company.
 Ineligible
 Juristic person
 Unemancipated minor or person under similar legal disability
 Does not satisfy any qualification set out in MoI
S69 - Ineligibility and disqualification of persons to be director
or prescribed officer
A person is disqualified to be a director of a company if—
(a) a court has prohibited that person to be a director, or declared the person
to be delinquent in terms of s162; or
(b) subject to an exemption of the court, the person—
(i) is an unrehabilitated insolvent;
(ii) is prohibited in terms of any public regulation to be a director of the company;
(iii) has been removed from an office of trust, on the grounds of misconduct
involving dishonesty; or
(iv) has been convicted and imprisoned without the option of a fine, or fined more
than the prescribed amount, for theft, fraud, forgery, perjury or an offence—
(aa) involving fraud, misrepresentation or dishonesty;
(bb) in connection with the promotion, formation or management of a company, or in
connection with any act contemplated in subsection (2) or (5); or
(cc) under this Act, the Insolvency Act,the Close Corporations Act, the Competition Act,
the Financial Intelligence Centre Act, the Securities Services Act, or the Prevention and
Combating of Corruption Activities Act.
S69 - Ineligibility and disqualification of persons to be director
or prescribed officer
A disqualification pursuant to being removed from an office of trust or a
criminal conviction ends at the later of—
(a) five years after the date of removal from office, or the completion of
the sentence imposed for the relevant offence, as the case may be; or
(b) at the end of one or more extensions, as determined by a court from
time to time.
S69 - Ineligibility and disqualification of persons to be director
or prescribed officer
The Registrar of the Court must, upon—
(a) the issue of a sequestration order;
(b) the issue of an order for the removal of a person from any office of
trust on the grounds of misconduct involving dishonesty; or
(c) a conviction for an offence referred in subsection (8)(b)(iv),
send a copy of the relevant order or particulars of the conviction, as the case
may be, to the Commission.
S69 - Ineligibility and disqualification of persons to be director
or prescribed officer

The Registrar of the Court must notify each company which has as a director to
whom the order or conviction relates, of the order or conviction.
S69 - Ineligibility and disqualification of persons to be director
or prescribed officer
The Commission must establish and maintain in the prescribed manner a
public register of persons who are disqualified from serving as a director, or
who are subject to an order of probation as a director, in terms of an order of a
court pursuant to this Act or any other law.
Vacancies on board
a person ceases to be a director, and a vacancy arises on the board of a company—
(a) when the person’s term of office as director expires where; or
(b) in any case, if the person—
(i) resigns or dies;
(ii) in the case of an ex offıcio director, ceases to hold the office that entitled the
person to be an ex offıcio director;
(iii) becomes incapacitated to the extent that the person is unable to perform the
functions of a director, and is unlikely to regain that capacity within a reasonable time;
(iv) is declared delinquent by a court, or placed on probation under conditions that are
inconsistent with continuing to be a director of the company, in terms of section 162;
(v) becomes ineligible or disqualified in terms of section 69; or
(vi) is removed—
(aa) by resolution of the shareholders;
(bb) by resolution of the board; or
(cc) by order of the court.
Removal of directors
Despite anything to the contrary in a company’s Memorandum
of Incorporation or rules, or any agreement between a company
and a director, or between any shareholders and a director, a
director may be removed by an ordinary resolution adopted
at a shareholders meeting by the persons entitled to exercise
voting rights in an election of that director, subject to subsection
(2).
Removal of directors
Before the shareholders of a company may consider a resolution
to remove a director-
a) the director concerned must be given notice of the meeting
and the resolution, at least equivalent to that which a
shareholder is entitled to receive; and
b) the director must be afforded a reasonable opportunity to
make a presentation, in person or through a representative, to
the meeting, before the resolution is put to a vote.
Removal of directors
Nothing deprives a person removed from office as a director in
terms of this section of any right that person may have at
common law or otherwise to apply to a court for damages or
other compensation for—
(a) loss of office as a director; or
(b) loss of any other office as a consequence of being
removed as a director.

This section is in addition to the right of a person, in terms of

section 162, to apply to a court for an order declaring a director
delinquent, or placing a director on probation.
Board committees
Except to the extent that the Memorandum of Incorporation of a
company provides otherwise, the board of a company may—
a) appoint any number of committees of directors; and
b) delegate to any committee any of the authority of the board.
Board committees
Except to the extent that the Memorandum of Incorporation of a
company, or a resolution establishing a committee, provides
otherwise, the committee—
(a) may include persons who are not directors of the
company, but—
(i) any such person must not be ineligible or disqualified to be a
director; and
(ii) no such person has a vote on a matter to be decided by the
committee;
(b) may consult with or receive advice from any person; and
(c) has the full authority of the board in respect of a matter
referred to it.
Board committees
The creation of a committee, delegation of any power to a
committee, or action taken by a committee, does not alone
satisfy or constitute compliance by a director with the required
duty of a director to the company, as set out in section 76.

This has the consequence that the directors may not simply rely
on any report made to the board by a committee. They must still
apply there minds to the report to fulfill their fiduciary duties.
Board committees
The Minister, by regulation, may prescribe—
(a) a category of companies that must each have a social and
ethics committee, if it is desirable in the public interest,
having regard to—
(i) annual turnover;
(ii) workforce size; or
(iii) the nature and extent of the activities of such companies;
(b) the functions to be performed by social and ethics
committees required by this subsection; and
(c) rules governing the composition and conduct of social and
ethics committees.
Board committees
A social and ethics committee of a company is entitled to –
(a) require from any director or prescribed officer of the company any
information or explanation necessary for the performance of the
committee’s functions;
(b) request from any employee of the company any information or
explanation necessary for the performance of the committee’s functions;
(c) attend any general shareholders meeting;
(d) receive all notices of and other communications relating to any general
shareholders meeting; and
(e) be heard at any general shareholders meeting contemplated in this
paragraph on any part of the business of the meeting that concerns the
committee’s functions.
Reg 42. Qualifications for members of audit
committees

 atleast one–third of the members of a company’s audit

committee at any particular time must have academic
qualifications, or experience, in economics, law, corporate
governance, finance, accounting, commerce, industry, public
affairs or human resource management.
Reg 43. Social and Ethics Committee

(1) This regulation applies to––

(a) every state owned company;
(b) every listed public company; and
(c) any other company that has in any two of the previous five years,
scored above 500 points in terms of regulation 26(2).

(2) A company to which this regulation applies must appoint a social and
ethics committee unless––
(a) it is a subsidiary of another company that has a social and ethics
committee, and the social and ethics committee of that other company will
perform the functions required by this regulation on behalf of that subsidiary
company; or
(b) it has been exempted by the Tribunal in accordance with section 72 (5)
and (6).
Reg 43. Social and Ethics Committee
A company’s social and ethics committee must comprise not less than three
directors or prescribed officers of the company, at least one of whom must be
a director who is not involved in the day-to-day management of the
company’s business, and must not have been so involved within the previous
three financial years.
Reg 43. Social and Ethics Committee
A social and ethics committee has the following functions:
(a) To monitor the company’s activities, having regard to any relevant legislation, with regard to
matters relating to -
(i) social and economic development,
(ii) good corporate citizenship, including the company’s––
(aa) promotion of equality, prevention of unfair discrimination, and reduction of corruption;
(bb) contribution to development of the communities in which its activities are predominantly conducted; and
(cc) record of sponsorship, donations and charitable giving;
(iii) the environment, health and public safety, including the impact of the company’s activities and of its
products or services;
(iv) consumer relationships, including the company’s advertising, public relations and compliance with
consumer protection laws; and
(v) labour and employment, including––
(b) to draw matters within its mandate to the attention of the Board as occasion requires; and
(c) to report, through one of its members, to the shareholders at the company’s annual general
meeting on the matters within its mandate.
Reg 26. Interpretation of regulations affecting
transparency and accountability

every company must calculate its ‘public interest score’ at the end of each financial
year, calculated as the sum of the following:—
(a) a number of points equal to the average number of employees of the company
during the financial year;
(b) one point for every R 1 million (or portion thereof) in third party liability of the
company, at the financial year end;
(c) one point for every R 1 million (or portion thereof) in turnover during the financial
year; and
(d) one point for every individual who, at the end of the financial year, is known by the
company––
(i) in the case of a profit company, to directly or indirectly have a beneficial
interest in any of the company’s issued securities; or
(ii) in the case of a non-profit company, to be a member of the company, or a
member of an association that is a member of the company .
average number of employees
 No guidance provided in the Act as to how to calculate
this value
 It is suggested that the number of employees in each
month be added together and divided by 12 to get the
average for the year
 Another approach that has been followed is to take the
number of employees at the beginning of the financial
year and the number at the end of the financial year and
divide that number by 2 – it is submitted that this
approach is to be avoided.
one point for every R 1 million (or portion
thereof) in third party liability
 Or portion thereof indicates that a point will be awarded even the
liability is not R1M
 E.g. R32,1m 33 points (not 32,1 points)
 There has also bee some debate as to what constitutes a “third
party”
 It has been suggested that monies owed by the company to it’s
own shareholders or to related companies do not qualify as “third
party liability”
 It is submitted that this approach ought not to be followed - one
should include all liabilities in the calculation of the PI Score
one point for every R 1 million (or portion thereof) in
turnover during the financial year
‘Turnover' is not defined in Regulation 26. Regulation 164
(which deals with the calculation of turnover for the
purpose of determining administrative penalties) does,
however, define the term ‘turnover'.
The definition provided in Regulation 164 is the same as
the definition provided for ‘revenue' in all the prescribed
financial reporting standards (FRSs).

It is therefore recommended that the definition of ‘revenue'

be considered when determining “turnover” for the purpose
of calculating the PI Score.
 one point for every individual who, has a beneficial interest in
any of the company’s issued securities

 Refer to s56(2)
 If a person has a beneficial interest and is also an employee they are not
counted twice
Board meetings
A director authorised by the board of a company—
(a) may call a meeting of the board at any time; and
(b) must call such a meeting if required to do so by at least
—
(i) 25% of the directors, in the case of a board that has at least 12
members; or
(ii) two directors, in any other case.

(2) A company’s Memorandum of Incorporation may specify a

higher or lower percentage or number.
Board meetings
The board of a company may determine the form and time for
giving notice of its meetings, but—
(a) such a determination must comply with any requirements set
out in the Memorandum of Incorporation, or rules, of the
company; and
(b) no meeting of a board may be convened without notice to all
of the directors, subject to subsection (5).
Board meetings
Except to the extent that the company’s Memorandum of Incorporation provides otherwise—
(a) if all of the directors of the company—
(i) acknowledge actual receipt of the notice;
(ii) are present at a meeting; or
(iii) waive notice of the meeting, the meeting may proceed even if the company
failed to give the required notice of that meeting, or there was a defect in the giving of
the notice;
(b) a majority of the directors must be present at a meeting before a vote may be called
at a meeting of the directors;[quorum]
(c) each director has one vote on a matter before the board;
(d) a majority of the votes cast on a resolution is sufficient to approve that resolution; and
(e) in the case of a tied vote—
(i) the chair may cast a deciding vote, if the chair did not initially have or cast a
vote; or
(ii) the matter being voted on fails, in any other case.
Directors acting other than at meeting

Except to the extent that the Memorandum of Incorporation of a

company provides otherwise, a decision that could be voted on at a
meeting of the board of that company may instead be adopted by
written consent of a majority of the directors, given in person, or
by electronic communication, provided that each director has
received notice of the matter to be decided.
 
A decision made in the manner contemplated in this section is of
the same effect as if it had been approved by voting at a meeting .
 Example
 BestBrands (Pty) Ltd is a local company that holds two fast food franchises
in Port Elizabeth. The franchises that it holds are Rocco Mamma’s and For
the Love Of Wine (FLOW). Rocco Mamma’s is a fast-food outlet specialising
in burgers, whereas FLOW is an establishment providing the customer with
access to high end wines which are not normally available to the public. You
are the attorney mandated to provide legal advice to BestBrands (Pty) Ltd.
 Example

A franchise agreement is a contract in which a well-established

business (the franchisor) consents to provide its brand, operational
model and required support to another party (the franchisee) for
them to set up and run a similar business in exchange for a fee and
some share of the income generated. The franchise agreement lays
out the details of what duties each party needs to perform and what
compensation they can expect.
 Example
• BestBrands (Pty) Ltd is struggling financially and wish to avoid the
expense of having their financial statements audited. This is part of an
extensive plan to make the company more efficient.
  
 They have provided the following information:
 
 In the relevant financial year, the company’s turnover was R24,1m.
 The company is owed R2,2m by the Nelson Mandela Bay Municipality
for supplying wine for one of their functions.
 The company owes R3m and R2m to the respective franchisors.
 Example
 The company owes Springfield Wine Estates R1,1 for wine purchased for the
Nelson Mandela Bay Municipality function.
 Throughout the relevant financial year, the company employed 15 people, including
the 5 executive directors, at its head office.
 During that time, it employed 20 staff members at Rocco Mamma’s and 12 at
FLOW.
 Helmut Rankler, one of the directors was married in community of property to
Maria Rankler who holds a 52% member’s interest in Yiayia’s Bistro CC.
 The company has 27 shareholders in addition to its directors, all of whom are also
shareholders.
  
 Calculate the company’s public interest score. In your answer you must provide
substantiation for your calculations. (10)