The Companies Act 61 of 1973 (the ‘old Act’) distinguished between the rights and duties of executive and non-executive directors.
The relationship between the company and its executive directors was regulated by their employment or service agreements and by prevailing corporate laws.
Under the old Act, executive directors are employees of the company, while non-executive directors are not.
Issues created by the old Act
This distinction created many practical problems.
One issue was that directors who have decision-making powers would be responsible for regulating matters that directly influence employment policies and remuneration.
This is a clear contradiction because the executive directors are also employees of the company.
The conflict could affect the notion of division of power and transparency in company structures.
The other issue was that if an executive director was not formally appointed as a director, then they could not be held accountable for their actions.
The new Act gives directors more power
The new Companies Act 71 of 2008 (the ‘new Act’) makes no distinction between directors, and in the new Act, the concept has been broadened extensively to include executive and non-executive directors, prescribed officers and directors ex officio.
The board of directors also has more power in terms of the new Act.
If this power is not limited by shareholders in the company’s memorandum of incorporation, there is a real risk that power could potentially be abused. This risk exists despite the amendments to company law.
Shareholder limitation — general meetings
Besides the division of power inherent in the company structure, it has always been important to maintain the division between ownership and management to promote corporate accountability and transparency.
The old Act promoted this distinction and the associated institutional transparency.
Under the old Act, decisions that affect ownership were always taken at shareholders’ meetings, and not just by management. The old Act stipulated that a general meeting is convened for the general body of shareholders, regardless of class of shares held.
By contrast, the annual general meeting (AGM) is a compulsory meeting with specifically defined discussion items described by statute.
In other words, the decision-making power does not lie in the hands of the board at a general meeting.
This is also a prime example of where the inherent distinction between ownership and management is historically personified in companies.
Although the provisions relating to the general meeting have remained constant in the new Act, the AGM is only compulsory for public companies (under section 61(7)), and not for all companies.
The memorandum of incorporation and other contracts with directors
The articles and memorandum make provision for certain rights and duties of directors. Under the old Act, these rights were not seen as a contract between the director and the company and were not legally enforceable.
This meant that the articles only guided the rights of directors regarding various aspects such as their rights, terms and conditions of service, termination of service and remuneration.
In reality, the directors’ rights and duties were determined by the existing contracts between the company and the directors, such as the contract of employment or service agreement.
Section 15(6) of the new Act has amended this position. The new Act makes the memorandum of incorporation and the governance rules legally binding between the company, its shareholders and its directors.
This change may make the contents legally enforceable if the service contract with a director is poorly drafted. But issues may arise where the contracts are contradictory.
In such cases, it would be advisable to review service agreements and to align the memorandum of incorporation (previously known as the articles and memorandum of the company) with the new Act.
Dismissal employment contracts
Because executive directors were also employees of the company, their contracts and service agreements and termination of employment conditions should comply with the prevalent labour legislation.
In addition, in terms of the prevailing labour legislation — specifically the Labour Relations Act 66 of 1995 (referred to here as the ‘LRA’), and the Constitution of the Republic of South Africa — every employee has the right to fair labour practices and not to be unfairly dismissed.
In terms of section 192 of the LRA where the company seeks to terminate a director’s contract of employment, it must follow a fair procedure which is in terms of the law.
It is generally accepted that a disciplinary hearing is regarded as a pre-dismissal procedure.
This is further reiterated as a legal right by the common law rule audi alteram partem which translates into to ‘hear the other side’.
Even though LRA does not expressly prescribe form or process for disciplinary hearings, the code of good practice does require that the employee has an opportunity to state his case.
The new Act has not overridden this principle, although there is now no distinction between executive and non-executive directors. Accordingly, the employment relationship is terminated by following the provisions of labour law.
Removal as director
Under the legislation cited above, and also under section 71 of the new Act, it is clear that the termination of the employment relationship is just that. It does not result in the termination the office of director.
This means that both aspects of the relationship must be terminated: the office of director and the employee contract.
In terms of section 220 of the old Act, a company may remove a director from office by ordinary resolution at a general meeting, before the termination of his office.
In addition, section 220(7) explicitly provides that this shall not detract from any power to remove a director which may exist apart from section 220.
The company may elect which procedure to follow. However, if he or she is removed from office, a director may institute action for breach of contract (section 220(7)) or for any losses or damages suffered as consequence.
Section 71 of the new Act replaced the old section 220. Section 71 of the new Act states that the directors may be removed by ordinary resolution.
Both the board and the director involved must be served notice, giving directors sufficient time to prepare a defence against the issues raised, which should be heard at the specified time.
After the director has made representations to the board, the board shall vote on the resolution.
As in the case of a disciplinary hearing for an employment relationship, the audi alteram partem common law rule provides the right to be heard and has now also been included in our Company law.
If he is removed from office, a director may institute action for breach of contract (section 71(9)) or for any losses or damages suffered as a consequence.
It should be noted that — under the transitional provisions of schedule 5 of the new Act — a person has the right to seek a remedy occurring before the effective date of the new Act, unless proceedings have commenced in a court of law.
Many feel this provision implies that the new Act is retrospective. This is purely based on interpretation and there is no precedent to support this contention.
Damages for breach of director’s duties
Where a director’s conduct breaches their fiduciary duties and/or their duty of care and skill and they have been removed as employee and director, in terms of section 77 and 218 of the new Act or common law, it is possible to institute a damages claim against them.
When terminating the relationship with its directors, it is crucially important that companies appoint an attorney to help ensure absolute compliance with the relevant labour legislation and corporate laws.
As a preventative measure, it is important to recruit directors wisely by selecting the right people and regulating their relationship with the company most appropriately from the outset.
Can Your Words Be Used Against You?
Yes, they most certainly can. Here’s what the RICA Act has to say about recordings.
“This call may be recorded for quality control and records purposes…” Anyone who has been on hold with insurance companies would be familiar with these words — but what are the implications of a recorded conversation and when is it legal?
In essence, the Regulation of Interception of Communications and Provision of Communication-Related Information Act of 2002 (mercifully shortened to ‘RICA’) permits any person, who is a party to a conversation to record that conversation, provided that it is direct communication — which is defined as oral communication between two or more persons that occurs in the immediate presence of those persons.
Section 4 of the RICA Act governs this aspect of our monitoring law. What is unclear, however, is the degree to which this extends to legal persons, such as a company that monitors a call centre agent’s performance, for example.
Related: Understanding Shareholder Agreements
Evidence in legal cases
While limited to direct communications and not covered by third party interception, such as an eavesdropper, the lesson here remains pretty stark — you could legally be recorded during any conversation you have.
The implications of this are significant — just ask former Springbok player Luke Watson, who had a conversation recorded during a function in 2008 that was subsequently leaked to the media.
Furthermore, with the widespread use of smartphones, together with applications freely available on the relevant app stores, designed to record cellphone calls, the likelihood of you being recorded — whether you know it or not, is ever increasing.
Beyond the moral or ethical ambiguity of this, the legal ramifications of what is recorded are more certain — the recording may be used against you as evidence in any criminal proceedings, or equally as possible, in civil proceedings where, for example, agreement to a contract or term thereof is in question, or in the insurance company’s case, whether or not to repudiate a claim based on the information you provide to them.
Related: Protect Your SME From PoPI
Know the business exception
Section 6 of the RICA Act contains a course of business exception that allows the interception of indirect communication:
- a) By means of which a transaction is entered into in the ordinary course of business
- b) Which relates to that business
- c) Which otherwise takes place in the course of that business.
While there has not, to my knowledge, been a reported case that deals with this aspect of the RICA Act, the implications regarding the use of this information to evidence the valid conclusion of a contract or as to the intentions of the parties to a contract are significant, particularly given that the scope is relatively broad, although limited.
The matter has, however, come before the Constitutional Court in the 1999 criminal case of S v Kidson, where the court held, per Justice Cameron, that unless a “reasonable expectation of privacy exists” it would be difficult to prevent the recording or interception falling within the ambit of the RICA Act.
Where to from here?
From both a commercial and criminal perspective, this should serve to remind us all of our wise grandmother’s words — if you have nothing nice to say, rather say nothing at all (especially because you never know whether you are being recorded).
Why You Shouldn’t Be Sweating The Fine Print
Signing a contract is a big deal, and you never want to sign anything you don’t fully understand.
While it is almost always a grudge purchase, ensuring that you have had a legal eye cast over a contract you intend to conclude means that you are protected, that you understand the nature of the obligations you are taking on and perhaps, an even better deal for you.
Given that legal agreements are an important aspect of commerce, we have distilled key points for you to consider, before engaging with external counsel. This will make the process more efficient and, hopefully, less expensive.
Reviewing a contract is a tricky business, not entirely different from asking a builder to finish building a half built house. However, there are some useful techniques to ensure you get the most out of the exchange with your lawyer.
Always create a timeline
You have lived and breathed your business and this transaction, while your attorney is possibly hearing about the matter for the first time.
Setting the scene correctly puts your attorney in the picture and explains what you want out of the exchange. Print this out for your attorney.
It will help an attorney identify key areas of risk which you might not have anticipated. Be sure to also tell your external counsel how quickly you need the review to be done. Setting expectations means there is less chance of disappointment later.
Provide supporting documents
It wastes your time and money when your attorney has to come back to ask you for supporting documentation.
Try to anticipate which documents will be relevant to your transaction and bring copies of them to the meeting for your attorney to consider. If you have previous versions of the agreement, for example, bring those too.
Remember, the more background work you do, the simpler and more efficient the process will be.
Understand your needs
Are you looking for a high level overview of your document to highlight some key contractual risks or are you looking for a thoroughly sanitised document reviewed from every possible angle?
I recently had to look over Jim’s Sale of Business Agreement for the potential acquisition of his Technology Company. He came to me with limited areas of risk which he had identified and wanted me to look at these clauses.
I was able to advise him to push back on certain clauses he had already negotiated and the resulting document placed him in a stronger legal and financial position. It was easy to justify the costs associated with the review.
This is not always necessary though — where there is limited legal exposure, or you have no bargaining power, the role of the attorney can be restricted, but still worth the investment since you have assurance that your legal exposure is as restricted as possible.
Be guided by the relative value of the document and the ensuing legal responsibilities — is this a standard supply agreement with a strange payment clause or a multi-national acquisition of intellectual property? The type of expert you engage with will vary, as will the cost of the review.
Areas of concern
Directly related to knowing your business and understanding your needs, is your responsibility to communicate specific areas of concern to your attorney.
A recent client’s business processed a lot of personal information, in accordance with the Protection of Personal Information Act, but, the contractor they were about to sign a service supply agreement sought to have access to some of this personal information.
Seen alone, there was little risk, but within the context of this business, we were able to avoid this. A trusted and qualified expert will help you navigate the complex commercial world.
Are You Protecting Your Customer’s Data?
The collection, usage and sharing of personal information is regulated primarily by the Protection of Personal Information Act 4 of 2013. The Act was recently promulgated and is yet to be implemented. The Act seeks to give expression to the right to privacy provided for in the Constitution.
At the time of writing, the primary enforcement arm contemplated by the Act, the Information Regulator, has yet to be appointed. Once appointed, all businesses will be required to register with the Information Regulator to make public what personal information is being collected, and what it is being used for.
The Information Regulator will be empowered to enforce compliance with the Act, and able to investigate whether an entity is lawfully processing the public’s personal information.
Related: Protect Your SME From PoPI
How are privacy policies affected?
The Act defines the term ‘processing’ broadly, and includes “the collection, receipt, recording, organisation, collation, storage, updating or modification, retrieval, alteration, consultation or use of a person’s personal information”. To process a person’s personal information, the prior consent of the person (data subject) is needed.
The Act restricts a company’s ability to store personal information outside of the country by requiring that it be transferred only to countries in which comparable security laws and data protection measures exist.
A situation such as this arises more easily than expected. Consider the example of the humble contact form: Your website, with its local server situated in Midrand, utilises a plugin to create custom contact forms.
Although your server may be in Midrand, every person who completes the contact form on your website has their personal information transferred and stored on servers in the home jurisdiction of your plugin creator, which may be in the US. But the plugin creator may also make use of third-party service providers based in Vietnam. An in-depth investigation of all third-party plugins and processes of a website is therefore required to ensure that you comply with the Act.
Access by a data subject to personal information
A data subject is entitled to request a full disclosure of any personal information held by the company.
As the procedures governing access to personal information overlap, companies should also ensure compliance with the processes outlined by the Promotion of Access to Information Act 2 of 2000 (‘PAIA’).
In terms of PAIA, all companies are required to compile a manual that needs to be registered with the South African Human Rights Commission. This manual sets out the company’s contact information, what records are available for inspection, the identity of the leadership of the company, as well as the manner in which a person may request access to information held by the company.
However, the Minister of Justice and Correctional Services has exempted private bodies from complying with this requirement for a period of five years, starting from
1 January 2016.
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