Directors

Learning Outcomes:

At the end of this section students should be able to do the following:

a. Define and explain who a company directors is
b. Recognize the different types of directors
c. Explain the duties and liabilities of a director
d. Understand the business judgment test;
e. Explain the concept of indemnification and directors insurance;
f. Recognize ineligible and disqualified persons
g. Explain, vacancies and removal of directors, and
h. Understand the functions of board committees.

1. Definition of the term Director

Section 1 of the Act defines a director

As a member of the board of a company … or an alternate director of a company and
includes any person occupying the position of a director or alternate director, by whatever
name designated.
Note this definition does not only include formally appointed directors, but also includes a de
facto director – that is, someone who has not been officially appointed, but who acts like a
director.
Section 66 of the Act recognises different types of directors and specifically provides that a
person becomes a director only when that person has given his or her written consent to
serve as a director after having been appointed or elected. The section further provides that
“the 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 person any of the function of the company.
The MOI of a company can curtail/limit the powers of the board of directors and ensure that
for certain transactions the directors cannot act alone and certain matters need to be referred
to the shareholders of a company for consideration and approval.
The Kings Code III identifies three types of directors: Executive directors, Non-executive
directors and Independent directors. The Kings code recommends that there should ideally be
a majority of non-executive independent directors, because this reduces the possibility of
conflicts of interest. A conflict of interest is when the director does what is in his/her best
interest rather than what is best for or in the interests of the company. In other words a
situation may arise in which the director has a personal interest while at the same time
representing the company.
Difference between executive directors, non-executive directors and independent
directors

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In law there is no real difference between these different categories of directors. The Act,
requires all directors to comply with the relevant sections of the Act. All directors must meet
the required standard of conduct when performing their functions and duties.
Executive directors are involved in the day-to-day management of the company or are full-
time salaried employees of the company (ex officio). An executive director, because of their
involvement in the day-to-day management of the company have an intimate knowledge of
the workings of the company. Executive directors are entrusted with ensuring that the
information laid before the board by management is an accurate reflection of their
understanding of the affairs of the company.
King III states that executive directors need to balance their management of the company,
and their fiduciary duties and independent state of mind when serving on the board. The
executive director needs to ask whether their action are right for the company and not
whether their actions are right for the management of the company.
Non-executive directors: are NOT involved in the day-to-day management of the company.
They play an important role in providing objective judgement independent of management on
a number of issues. Non-executive directors are independent of management on all issues
including strategy, performance, sustainability, resources, transformation, diversity,
employment equity, standards of conduct and evaluation of performance.
The non-executive directors should meet from time to time without the executive directors to
consider the performance and actions of executive management.
Independent director: defined in detail in King III. Basically an independent director is a
non-executive director who:
 is not a representative of a shareholder who has the ability to control or significantly
influence management or the board
 does not have a direct or indirect interest in the company (including any parent or
subsidiary)
 has not been employed by the company or the group of which it currently forms part
in any executive capacity or appointed as the designated auditor/ senior legal adviser
during the past three financial years
 is not a member of the immediate family of an individual who is, or has during the
past three financial years, been employed by the company or the group in an
executive capacity
 is not a professional adviser to the company or the group, other than as a director
 is free from any business or other relationship which could be seen by an objective
outsider to interfere materially with the individual’s capacity to act in an independent
manner, such as being a director of a material customer of or supplier to the company
 does not receive remuneration that depends on the performance of the company

2. Types of directors

Directors can be elected by the shareholders or appointed. The Companies Act recognises the
following types of directors:

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 Holds office as a director of a company solely as a result of holding
Ex officio director another office or title or status. For example the Financial director
or Marketing director are not appointed as directors but because
they head up those departments in the company they are considered
ex officio directors.
The Memorandum of Incorporation can specify how and/or by
Memorandum of
whom such a director is appointed
Incorporation
appointed director

Elected or appointed to serve as a member of the board of a

Alternate director
company in substitution for a particular elected or appointed
director of that company

Elected director In the case of a profit company, at least 50% of the directors must
be elected by shareholders

Temporary director Appointed in order to fill a vacancy

3. Number of directors

A private or personal liability company must have at least one* director

A public or non-profit company must have at least three* directors
Where a company does not have the prescribed number of directors any act done by the board
or the company will nevertheless remain valid
*The Memorandum of Incorporation can specify a higher number of directors than the
minimum number required by the Act.

4. Appointment of Directors

 A person becomes a director in terms of the Companies Act or the Memorandum of

Incorporation; OR
 Holds an office, title, designated or similar status entitling that person to be an ex
officio director of the company; AND
 Has delivered to the company a written consent accepting the position of
director.

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 5. Ineligible and Disqualified persons

Certain people are ineligible to be appointed as a director, while certain people are
disqualified to be a director of a company. Ineligible means not eligible- these persons
CANNOT be directors. Disqualified means these people may be directors but they act in a
manner that disqualifies them from acting in the capacity of a director.
The provisions that make a person negligent or disqualified apply not only to those wishing
to be a director, but also to be following:
 An alternate director
 A prescribed officer; and
 Any 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 such a person is also a member of
the company’s board.
Ineligibility and disqualification: Section 69

Ineligibility Disqualification

A disqualification from being a director is not

A person who is ineligible to be a absolute. A court has a discretion to permit a
director is absolutely prohibited disqualified person to accept appointment as a
director. Disqualified:
from becoming a director. There are
 A person prohibited by a court of law
no exceptions to the prohibition. from becoming a director
 A person declared to be delinquent by a
 A juristic person court of law
 An un emancipated minor or  An un-rehabilitated insolvent
person under a similar legal  A person prohibited in terms of any
public regulation to be a director
disability
 A person removed from an office of trust
 Any person who does not because of dishonesty
satisfy any requirement set  A person convicted and imprisoned
out in the Memorandum of without the option of a fine for theft,
fraud, forgery, perjury or other offences
Incorporation as specified in the Companies Act
 A person disqualified in terms of the
Memorandum of Incorporation.

 An ineligible or disqualified person must not be appointed or elected as a director

 A company must not knowingly permit an ineligible or disqualified person to serve as
a director
 A person who becomes ineligible or disqualified while serving as a director ceases to
be a director and should immediately vacate office.

6. Vacancies on the board

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 A person ceases to be a director and a vacancy arises on the board in any of the following
circumstances:
 The period of a fixed term contract expires
 The person resigns or dies
 The position of an ex officio director becomes vacant
 The person becomes incapacitated, is declared delinquent, is placed under probation
under conditions that are inconsistent with being a director, or becomes ineligible or
disqualified from being a director
 The person is removed from office
If a vacancy arises on the board, other than as a result of an ex officio director ceasing to hold
that office, it must be filled by a new appointment or by a new election conducted at the next
Annual General Meeting of the company – if required. In any other event it must held within
6 months after the vacancy arose, at a shareholders meeting called for the purpose of electing
that director.

7. Removal of directors
Section 71 of the Act regulates the removal of directors. Directors may be removed by either
shareholders or directors.

Removal by shareholders Removal by directors

Despite anything to the contrary contained in:

The board of directors may remove a director if:
 The Memorandum of Incorporation
rules  A company has more than two directors
 Any agreement between a company and and a shareholder or director alleges that
a director a director has become ineligible or
 Any agreement between any disqualified to be a director
shareholder and a director  A director has become incapacitated i.e.
unable to perform his functions
A director may be removed by an ordinary  A director has neglected or has been
resolution adopted at a shareholders’ derelict in the performance of his duties.
meeting.

The director must be given a reasonable opportunity to make a presentation to the meeting
before the resolution is voted upon by the shareholders or the board. If the removal
constitutes a breach of contract the director may claim damages or other compensation for
loss of office.

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 8. Term of office

The term of office refers to the length of time a person may act as a director of a company.
A director must be elected by persons entitled to exercise voting rights and can serve either
for an indefinite term or for a fixed term as set out in the Memorandum of Incorporation.

9. Remuneration

The remuneration of directors is regulated in terms of Section 66(8) and (9) of the Act. A
director does not have an automatic right to remuneration.
Except to the extent that the Memorandum of Incorporation provide otherwise, a company
may pay remuneration to its directors for their service as directors, but such remuneration
must be paid in accordance with the special resolution passed by shareholders within the
previous two years.

10. Board committees

Except to the extent that the Memorandum of Incorporation provides otherwise, the board
may appoint any number of committees and may delegate any of its authority to the
committee.
The board remains liable for the proper performance of the duty.
The King Code recommends that a public listed company should have an audit,
remuneration, nomination and risk management committee.

11. Board meetings

A director authorised by a board may call a meeting at any time

A meeting must be called if required:
 by the number of directors specified in the
CALLING A MEETING Memorandum of Incorporation
 by at least 25%* of the directors where the board has at
least 12 members
 by at least 2* directors where the board has at least 12
members
The board must determine the form of notice and notice period,
NOTICE provided there is compliance with the Memorandum of
Incorporation

QUORUM
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A majority of directors must be present before a vote can be called

Every director has one vote, and approval of a resolution requires a

VOTING majority of the votes cast

Meetings may be conducted electronically provided that all

ELECTRONIC
participants are able to communicate concurrently without any
COMMINICATIONS
intermediary

 The Memorandum of Incorporation can specify a higher or lower number.

12. Decisions taken without convening a meeting

In terms of Section 60 of the Act, directors can make decisions without having to call a
board meeting.

Board decisions may be adopted by written consent of a majority of the directors, given in
person or by electronic communication, provided that each director received notice of the
matter to be decided.

13. Duties of directors

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The Companies Act has partially codified the common law duties of directors. This statement
of directors’ duties preserved the common law.

DUTY DETAILS SECTION

Duty to A director must disclose to the board or the shareholders any S75
disclose personal financial interest in a matter to be considered at a
a personal board meeting or an agreement or other matter in which the
financial company has a material interests
interest

Duty not to A director must not abuse his position, or any information S76(2)(a)
abuse his obtained as a director, to gain an advantage for himself or
position or for another person other than the company or a wholly-
information owned subsidiary of the company, or to knowingly cause
harm to the company or a subsidiary of the company

Duty to A director must communicate to the board at the earliest S76(2)(b)

communicate practical opportunity any information that comes to his
information attention, unless he reasonably believes that the information is
with the immaterial to the company, or is generally available to the
board public or known to the other directors, or where a legal or
ethical obligation of confidentiality prevents him from
disclosing the information.

Duty to act in A director must exercise his power and perform his S76(3)(a)
good faith and for functions in good faith and for a proper purpose
a proper purpose

Duty to act in the A director must exercise his powers and perform his S76(3)(b)
best interests of functions in the best interests of the company
the company

Duty to act with a A director must exercise that degree of care, skill and S76(3)(c)
certain degree of diligence that may be expected of a person
care, skill and  Carrying out the same functions in relation to the
diligence company as those carried out by that director
 Having the general knowledge, skill and
experience of that director.

14. Business judgement rule

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In terms of Section 76 of the Act, this rule states that a director is deemed or presumed to
have exercised his powers or functions in the best interests of the company and with the
requisite degree of care, skill and diligence and provided that:

 The director had taken reasonably diligent steps to become informed about the matter
in question
 Either the director had no material personal financial interest in the matter or had
disclosed his financial interest to the board or the shareholders; and
 The director reasonably believed that the decision made by him or the board was in
the best interests of the company.

15. Liability of directors

In terms of Section 77 of the Act, a company may recover loss, damages or costs sustained by
it as a result of its director’s acting in breach of the common law principles relating to
fiduciary duties or a breach of the duty to act with care and skill. A company may recover
loss, damages or costs sustained by it from the directors in various other circumstances, set
out in this section of the Act.

16. Relief of directors by a court

In terms of Section 77 of the Act:

In any proceedings against a director, other than for wilful misconduct or wilful breach of
trust, a court may relieve the director from liability if it appears to the court that the director
has acted honestly and reasonably or it would be fair to excuse the director.

17. Indemnification and directors’ insurance

In terms of Section 78 of the Act:

Any provision in any agreement, the Memorandum of Incorporation or rules of a company or

a resolution adopted by the company, whether express or implied, is void to the extent that it
directly or indirectly purports to relieve a director of a duty or a liability.
Subject to important limits a company may take out indemnity insurance to protect:
 A director against liability or expenses for which the company is permitted to
indemnify a director
 Itself against any expenses that it is permitted to advance to a director or is permitted
to indemnify a director.

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