It has been suggested that provisions of the new Companies Act may trigger flight from boardrooms because careless behaviour could have catastrophic implications not only for the company, as seen in the collapse of Enron, Leisurenet and the like, but also for directors personally.
An interesting innovation of the new Act is that the duties of directors are spelt out. These provisions have been subject to much public comment and concern as some feel that these duties will be overly burdensome for directors with the result that few would be prepared to accept the position of director. These worries are not well founded, as the Act merely records the existing common law duties of directors and stipulates that its provisions be interpreted in accordance with our existing law. The result is that there will be very little change in regard to the duties of directors from the existing position.
Take the recent Supreme Court of Appeal decision in Da Silva v CH Chemicals (Pty) Ltd as an example. In this case, CH Chemicals sued Da Silva for the disgorgement of profits, alternatively for the payment of damages arising from alleged breaches of his duties as managing director. The court referred to the well known rule of company law that directors have a fiduciary duty to exercise their powers in good faith and in the best interests of the company. If one looks at section 76 of the new Act, it will be seen that its provisions provide for precisely that duty. Section 76(3) provides that a director of a company must exercise his powers and functions "in good faith and for a proper purpose" and "in the best interests of the company". These provisions are in line with the principles restated in Da Silva and cases such as this will be considered in future to give content to the meaning of the new law.
The codification of directors' duties is a positive change to our law and is in line with international trends in countries such as Australia. Directors will be able to look up their duties with a mere glance at the Act, without having to read through complicated text on the subject. The new King III report on corporate governance, which is to be released later this year, will also be a helpful guide to those directors who wish to ensure that they are walking a straight line in the right direction. In fact, the draft report identifies both the duty to act in the best interest of the company and the over-arching importance of managing conflicts of interest.
Another development that does not emanate from the Companies Act, but is of interest to directors and could change the rules of the directorship game, is the prospect of the Competition Amendment Act, which is yet to be signed into law. In terms of the proposed amendments to our competition laws, it is mooted that fines of up to R500 000 or prison sentences of up to 10 years, or both, may be imposed on directors of companies who are responsible for, or knowingly acquiesce in, fixing of prices and trading conditions, market division or collusive tendering. It is yet to be seen whether these proposals will be adopted and, if adopted, whether they will be subject to constitutional scrutiny. Whether there is personal liability or not directors should ensure that competition audits and training are done and ensure compliance.
Written by: Stephen Kennedy-Good of Deneys Reitz