Business Enterprise Law - Laws 2007 PDF

Summary

This document covers business enterprise law, specifically focusing on the topic of company organs, including shareholders, company and board meetings, and director duties. It details the required processes and procedures. It's a lecture on the subject. Provided by Daven Dass.

Full Transcript

Business Enterprise Law - Laws 2007 Topic 5 Organs of the Company Shareholders, Company and Board Meetings The Board of Directors and Directors Duties Daven Dass Introduction As a company has no physical existence it can onl...

Business Enterprise Law - Laws 2007 Topic 5 Organs of the Company Shareholders, Company and Board Meetings The Board of Directors and Directors Duties Daven Dass Introduction As a company has no physical existence it can only perform actions through human beings – its shareholders and its directors, managers and employees. Which group of persons has the right (or duty) to perform various actions on behalf of the company will usually be determined by the MOI or the Companies Act. – For example: s 71(1) of the Act gives the power to shareholders to remove a director at any time by ordinary resolution. Shareholders meetings (section 61) A shareholder is the holder of a share issued by a company and who is entered as such in the certificated or uncertificated securities register of a company. A shareholders meeting is a meeting of those holders of a company’s issued securities who are entitled to exercise voting rights in relation to that matter. Two types of meetings: – General meetings: general body of shareholders. – Class meetings: shareholders of a specific class. Calling a shareholders meeting (section 61) A shareholders meeting will be properly convened only if the prescribed notice for convening the meeting was given by: – the board of directors – any other person specified in the Memorandum of Incorporation or rules – the shareholders, by written demand (10 percent voting rights attaching to share). Failure to comply with the prescribed formalities for a meeting could result in an invalid decision. In certain instances exceptions are made to the rules and formalities for shareholders meeting. Calling a shareholders meeting (section 61) (continued) If the required percentage of the shareholders have demanded the calling of a shareholders meeting, the board of directors is obliged to hold the meeting. The board cannot over-rule the shareholders on that point. Notice of meetings must be in writing: Public company/NPC: 15 business days before. Other companies: 10 business days before. Lack of proper notice: meeting may proceed if all persons are present / waive notice / ratify the defective notice. Annual General Meetings (AGM) (section 61) A public company must hold its first AGM no more than 18 months after the company’s date of incorporation, and thereafter no more than 15 months after the date of its previous AGM. The Companies Act of 2008 prescribes the matters which must be discussed at the AGM. Annual General Meetings (AGM) (section 61) (continued) Business to be provided for at AGM: – Presentation of directors’ report, audited financial statements and an audit committee report – Election of directors – Appointment of an auditor and an audit committee – Any matters raised by shareholders. General practice for the chairman to submit a chairman’s report. Proceedings regulated by MOI. Record date (section 59) The board of directors may set a record date for determining which shareholders are entitled to: – receive notice of a shareholders meeting – participate in the vote at a shareholders meeting – decide any matter by written consent or electronic communication. Section 62(1) of the Act stipulates that a company must deliver a notice to all of the shareholders. Failure to do so will render decisions taken at the meeting invalid. Proxies (section 58) A proxy is an agent appointed by a shareholder to attend, participate in, speak and vote on his or her behalf at a MEANING shareholder’s meeting The proxy may be: any individual (who does not have to be a shareholder of the company); or WHO two or more persons concurrently appointed to exercise voting rights attached to different shares held by the shareholder. The proxy form must be: in writing PROCEDURE signed by the shareholder appointing the proxy delivered to the company prior to the proxy exercising any rights of the shareholder at the shareholder’s meeting. The appointment of a proxy is valid for one year after it was signed, and remains valid until the end of the meeting at VALIDITY which it was intended to be used. The shareholder who appointed the proxy has the right to revoke the appointment by: cancelling the appointment in writing; or REVOCATION making a later inconsistent appointment of a proxy, and delivering a copy of the revocation instrument to the proxy and to the company. The proxy may vote as he or she thinks fit unless the shareholder has indicated on the proxy form whether the proxy VOTING must vote in favour of or against a particular resolution. Quorum and Conduct at Meetings (sections 64 and 63) Quorum for a meeting to commence At least 25%* of all the voting rights that are entitled to be exercised in respect of at least one matter to be decided at the meeting. If a company has more than 2 shareholders At least 3 shareholders must be present at the meeting in order for the meeting to commence or for a matter to be considered, provided that the members present can exercise at least 25%* of all the voting rights that are entitled to be exercised. Show of hands Any person present (including proxy) and entitled to exercise voting rights has only one vote, irrespective of the number of shares held by that person. Meetings can be electronic Postponement and adjournment of meetings (section 64) A meeting may be postponed or adjourned for one week (MOI may alter) if, within one hour (MOI may alter) after the appointed time for a meeting to begin, a quorum is not present. Where a quorum is not present at the postponed or adjourned meeting, those present in person or by proxy will be deemed to constitute a quorum. A meeting may be adjourned from time to time without further notice on a motion supported by a majority of the voting rights held by all those present at the meeting. Decisions taken at a general meeting (section 65) Ordinary resolutions Special resolutions A decision taken at a general meeting with the support of A decision taken at a general meeting with the support of at least more than 50% of the voting rights exercised on the 75% of the voting rights exercised on the resolution resolution The Memorandum of Incorporation may specify a higher The Memorandum of Incorporation may permit a lower percentage percentage of voting rights to approve the resolution of voting rights to approve the resolution Provided there is a margin of at least 10 percentage points Provided there is a margin of at least 10 percentage points between between the requirements for the adoption of an ordinary the requirements for the adoption of an ordinary and a special and a special resolution resolution Required for the following decisions: Amendment of the Memorandum of Incorporation Approving the voluntary winding-up of the company Approval of a sale of assets, a merger, an amalgamation or a scheme of arrangement Approval of directors’ remuneration Any other matter required by the Memorandum of Incorporation Proposing shareholder resolutions (section 65) A shareholder resolution may be proposed by the board of directors or any two shareholders. A proposed resolution must: – be expressed with sufficient clarity and specificity – be accompanied by sufficient information or explanatory material to enable shareholders to decide whether to participate in the meeting and to cast their votes. Decisions taken without convening a meeting (section 60) Written resolutions are permissible without the need for a formal meeting. The resolution must be supported by the same threshold majority generally required for an ordinary or special resolution. Business required to be conducted at the annual general meeting of the company may not be conducted in this way. All shareholders must vote in writing within 20 business days after the resolution is submitted to them. If adopted, the resolution has the same effect as if approved by voting at a meeting. Within 10 business days after adopting the resolution, the company must deliver a statement describing the results. Decisions taken without convening a meeting (section 60) Written resolutions are permissible without the need for a formal meeting. The resolution must be supported by the same threshold majority generally required for an ordinary or special resolution. Business required to be conducted at the annual general meeting of the company may not be conducted in this way. All shareholders must vote in writing within 20 business days after the resolution is submitted to them. If adopted, the resolution has the same effect as if approved by voting at a meeting. Within 10 business days after adopting the resolution, the company must deliver a statement describing the results. Directors and Board Committees Who is a director? Definition of “Director” – sec 1 of the Companies Act, 2008 “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” ITO of sec 75 and 76, “directors” include the following (wider meaning): – Directors – Alternate directors – Members of board committees (even if they are not board members) – Members of the audit committee (who all have to be a board members) – Prescribed officers Role of a Director 1. Leadership 2. Decision Making 3. Fiduciary duties 4. Manage relationship with shareholders 5. Determine the ethics and values of the company 6. Company Administration Private company – at least 1 director Public company – at least 3 directors NB: MoI may alter minimum or maximum number of directors Types of Directors ❖ Ex officio director Holds office as a director solely as a result of holding another office, title or status, e.g. CEO Not (necessarily) appointed by Shareholders Has all powers, functions, duties and liabilities as any other director, but subject to the MOI ❖ MOI-appointed director Not appointed by shareholders, unless MOI states so MoI specifies how and/or by whom such a director is appointed ❖ Alternate Director Appointed or elected subject to the contents of the Moi. S1 of the Act - ‘‘alternate director’’ means a person elected or appointed to serve, as the occasion requires, as a member of the board of a company in substitution for a particular elected or appointed director of that company. Profit company – at least 50% of alternate directors must be elected by shareholders ❖ Elected director Profit company –at least 50% of directors must be elected by shareholders ❖ Temporary directory Moi can provide for the appointment of a temporary director Unless the Moi provides otherwise, directors may appoint a temporary director 1) Executive Directors Involvement in the day-to-day management of the company or being in the full-time salaried employment of the company (or its subsidiary) or both. 2) Non-executive Directors Not being involved in the management of the company. King Code IV Independent Directors King IV has enhanced the provisions regarding the classification of non- executive members as ‘independent’. First directors The Act determines that each incorporator of a company will also be a first director of that company. This directorship will be temporary and will continue until a sufficient number of directors have been first appointed or first elected in terms of the requirements of the Act If incorporators plus ex officio directors together do not meet required min. number of directors, s/holders’ meeting must be called within 40 business days ▪ Each director, excluding first directors and ex officio directors, must be elected by the persons entitled to exercise voting rights in such an election, to serve for an indefinite term, or for a term as set out in the Memorandum of Incorporation ▪ Election constituted by series of votes – Each voting right only to be exercised once – Majority of voting rights must support candidate ▪ Board may appoint temporary director until vacancy can be filled Ineligibility and disqualification (s 69) Directors’ duties Partial codification in the Act of directors’ common-law duties Common-law duties remain Common Law Duty to avoid conflict of interest No-profit rule: requires a director to account to the company for any profit he makes from his position Corporate opportunity rule: prohibits a director from appropriating (taking) any contract, information or other opportunity that properly belongs to the company and that came to him or her as a director of the company Argument that s76(a)(i) & (ii) are wide enough to encapsulate both of these rules – so these rules are still relevant Common law duty to exercise an independent judgment In deciding what is in the best interests of the company, directors must exercise an independent and unfettered discretion. Directors must consider the affairs of the company in an unbiased and objective manner. No specific reference to this duty in the act because it is a part of the duty to act in good faith and in the best interests of the company. Directors’ Personal Financial Interests Director may at any time disclose – in writing – any personal financial interest in advance (s 75(4)) If board meeting due to discuss matter in which director OR a related person has a personal financial interest, director obliged to disclose such interest before the matter is discussed at the meeting (s 75(5)) If not possible to disclose prior to meeting, director may also disclose afterwards (s 75(6)) Who is a related person? s2(1) of the Act (a) an individual is related to another individual if they— – (i) are married, or live together in a relationship similar to a marriage; or – (ii) are separated by no more than two degrees of natural or adopted consanguinity or affinity; (b) an individual is related to a juristic person if the individual directly or indirectly controls the juristic person Standards of directors’ conduct (sec 76) Duty not to abuse his position or information Duty to communicate to the board of directors Duty to act in good faith and for a proper purpose Duty to act in the best interests of the company Duty to act with a certain degree of care, skill and diligence. Standards of directors conduct Standards of directors conduct (continued) Duty to exercise powers for proper purpose – S76(3)(a) At common law, it has always been taken to mean that directors must exercise their powers for the objective purpose for which the power was given to them and not for a collateral or ulterior purpose 4-tier test to determine whether powers exercised for a proper purpose: – identify the particular power that is being challenged (what the power is?) – identify the proper purpose for which the power is given to directors (why the power was given?) – identify the substantial purpose for which the power was in fact exercised (true reason why the power was used?) – decide whether this purpose was proper Business judgment rule (section 76) The rule deems a director to have exercised his powers or functions in the best interests of the company and with the requisite degree of care, skill and diligence provided that: i. The director had taken reasonably diligent steps to become informed about the matter in question ii. Either the director had no material personal financial interest in the matter or had disclosed the conflict of interest as required by section 75 of the Companies Act iii. The director had a rational belief that the decision was in the best interests of the company. Liability of directors (s 77) A director may be held liable for any loss, damages or costs incurred by another: – In accordance with the common law relating to a breach of a fiduciary duty – As a result of a breach of s 75 (Directors’ personal financial interests) – In accordance with the common law relating to delict: the circumstances in which one person can claim compensation from another for harm that has been suffered. “civil wrong” ✓ "harm sustained by the plaintiff;" ✓ "conduct on the part of the defendant which is ✓ "wrongful;" ✓ "a causal connection between the conduct and the plaintiff's harm;" and ✓ "fault or blameworthiness on the part of the defendant. Claim, e.g. patrimonial damages, for instance loss of income. Liability of directors (s 77) A director may be held liable for any loss, damages or costs incurred by the company, as a consequence of the director: – Acting in the name of the company despite knowing that he lacked authority – Carrying on business in a manner prohibited by s 22(1) (reckless trading) (sec 22. (1) A company must not— (a) carry on its business recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose; or (b) trade under insolvent circumstances. ) – Defrauding a creditor, employee or s/holder or for another fraudulent purpose – Signing or authorising the publication of false or misleading financial statements, a prospectus or a written statement Relief of directors by a court (s 77) 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. Application to declare a person delinquent or under probation (s162) – Various persons may apply to court for an order to declare a person to be delinquent or under probation upon certain grounds specified in the Companies Act – A person who has been declared to be a delinquent is disqualified from being a director in terms of s 69(8)(a). – Persons declared to be delinquent may in certain instances apply to court to suspend or set aside the order of delinquency Removal of directors (section 71) Removal of directors (continued) – The director must be given a reasonable opportunity to make a presentation during 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 – Where the board of directors has resolved to remove the director he or she may apply to court to review the board’s determination Kaimowitz V Delahunt And Others 2017 (3) SA 201 (WCC) Presents a useful assessment of the limitations of directors’ rights. Kaimowitz was a director and employee of a respondent company. On receiving notice that his employment was to be terminated, the applicant’s role within the company altered dramatically. Importantly, his directorship would be sustained, albeit in capacity as non-executive director. While he was entitled to attend directors’ meetings, he was prohibited from being involved in the day-to-day management of the company. The court was therefore called upon to determine whether a director, save for where provided for in the Memorandum of Incorporation (MOI), is entitled to be involved in the day to day running of the company Kaimowitz V Delahunt And Others 2017 (3) SA 201 (WCC) The court distinguished between the roles of a director and a manager, aiding the conclusion that on the facts before it a director is not entitled as a right to be involved in the day to day activities of the company. On a proper interpretation of section 66(1) of the Act, the day to day management of a company may be delegated by the board of directors (the board) to a managing director and/or committees of the board. The right to such involvement does not, therefore, reside with each director individually. The court thus concluded that the management of a company in terms of its overall supervision resides in the board as a collective as opposed to individual directors. Kukama v Lobelo and Others Kukama v Lobelo and Others, Tshabalala J found that the evidence before him indicated that the director in question had, inter alia, failed to refund SARS R39,000,000.00, causing irreparable harm to the company and also exposing the said company and the applicant in that case to criminal liability; and Failed to alert his co-director and co-shareholder of the fraudulent transaction and a repayment by SARS of R22,000,000.00 into an account of another company over which the applicant held no directorship. The conduct is, obviously, of an extremely serious nature and the director was declared delinquent in such circumstances. Robinson v Randfontein Estates Gold Mining Co Ltd Robinson was Chairman of the Board of REGM REGM held lease in the mineral rights on a farm, Waterval Robinson wanted to buy farm from owner for the company, but they could not agree on terms of sale Then Robinson bought undivided half share of farm through an agent for £60 000 Sold share of farm for £ 275 000 to Waterval Trust Company, which was established by REGM to buy and hold the farm for a period Robinson v Randfontein Estates Gold Mining Co Ltd Innes CJ: “Where one man stands to another in a position of confidence involving a duty to protect the interests of that other, he is not allowed to make a secret profit at the other’s expense or place himself in a position where his interests conflicts with his duty.” If there was a breach of director’s fiduciary duty, then the company may choose to keep the acquisition and claim a refund of the profit made by the director Hence, Robinson had to repay the profit of £ 215 000 made by him on the sale of the property to Waterval Trust Company Regal (Hastings) Ltd v Gulliver Regal (Hastings) Ltd (Regal) owned a cinema. Regal took out leases on two more cinemas, through a new subsidiary (Hastings Amalgamated Cinemas Ltd), in order to create a viable sale package. The landlord wanted personal guarantees from the directors. The directors refused to do so. The landlord then offered to up the share capital to £5,000. Regal itself put in £2,000, but could not any afford more (though it could have got a loan). Four directors each put in £500. Mr Gulliver, Regal’s chairman, got outside subscribers to put in £500 and the board asked the company solicitor, Mr Garten, to put in the last £500. The directors sold the business and made a profit of nearly £3 per share. Shortly after, the buyers brought an action against the directors, saying that this profit was in breach of their fiduciary duty to the company. The directors had not gained fully informed consent from the shareholders Regal (Hastings) Ltd v Gulliver Was there a breach of the directors’ fiduciary duties to Regal? Court held that directors must account for activities outside the company if – (i) what the directors did is related to the company in such a way that it can be said to arise out of their management of the co or as a result of their special knowledge as directors; and – (ii) their actions resulted in profits for themselves Regal (Hastings) Ltd v Gulliver “The rule of equity which insists on those, who by use of a fiduciary position make profit, being liable to account for the profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether profit would or would otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account.” Industrial Development Consultants Ltd v Cooley Architect (Cooley), who was managing director of IDC Ltd (a construction co), negotiated with a gas board on behalf of IDC to develop gas depots. Negotiations did not succeed, but in private meeting with representative of gas board, Cooley learned that there may be personal business opportunities for himself to develop a particular depot. Thus, he claimed he suffered from ill health to secure a speedy release from his position as MD of IDC Ltd. Subsequently appointed as project manager on four projects with gas board. When IDC Ltd found out about this, instituted action for plaintiff to account for profits he made as a result of what they alleged was a breach of his fiduciary duty to IDC Ltd. Industrial Development Consultants Ltd v Cooley Court held: “It seems to me plain that throughout the whole of May, June and July 1969 Cooley was in a fiduciary relationship with the plaintiffs. From the time he embarked upon his course of dealing with the Eastern Gas Board,… he embarked upon a deliberate policy and course of conduct which put his personal interest as a potential contracting party with the Eastern Gas Board in direct conflict with his pre-existing and continuing duty as managing director of the plaintiffs. That is something which for over 200years the courts have forbidden.” ▪ Irrelevant whether IDC Ltd would have secured the contract with the gas board had Cooley not withheld information. Fisheries Development Corporation of SA Ltd v Jorgensen; Fisheries Development Corporation of SA Ltd v AWJ Investments (Pty) Ltd In Fisheries Development Corporation of SA Ltd v Jorgensen; Fisheries Development Corporation of SA Ltd v AWJ Investments (Pty) Ltd, held that: 1. the extent of a director’s duty of skill and care largely depends on the nature of the company’s business; 2. that the law does not require of a director to have special business acumen; 3. that non-executive director not bound to give continuous attention to affairs of company

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