It is important for people in executive and management positions to be aware that, despite not being formally appointed and elected as directors, they could be subject to the same fiduciary duties and liabilities as formally appointed directors under the Companies Act, 2008.
Commenting on the Companies Act, 2008, Lischa Gerstle, Director at pan-African law firm Bowman Gilfillan, explained that the concept of a “prescribed officer” is a new one under the Act, and is likely to be subject to much interpretation by our courts in the future.
“Many of the provisions of the Act that regulate directors also apply to so-called prescribed officers. Some examples include an obligation to disclose personal interests in company matters, to exercise reasonable care, skill and diligence and to act in accordance with the fiduciary duties codified in the Act,” she said.
The Act defines a “prescribed officer” as a person who despite not being a director of a company, regularly exercises general executive control over and management of the whole, or a significant portion, of the business and activities of the company, or who regularly participates to a material degree in this exercise of control.
This definition applies irrespective of any particular title given to the person in question or function performed by that person for the company.
According to Ms Gerstle: “It will be up to the courts to determine on a case by case basis the nature, degree and amount of participation or control that is required to term a person a prescribed officer for purposes of the Act.
“In determining whether someone qualifies as a prescribed officer, one needs to look at the person’s actual conduct in the context of the company and situation, not their title or function.”
“Assuming that it is correct that the prescribed officer provision in the Act is intended to catch those who are not formally appointed as directors but still exercise influence on the decision-making process of a company, and are regularly involved to a material degree in the management of such company, one could conclude that a prescribed officer is a new creature under the Act who exists alongside a formally appointed director or an alternate director.”
Another question that has been raised in the context of the kind of executive control or management that is required to qualify as a prescribed officer is whether these need to be direct control, or whether indirect control and management suffices?
If South African courts interpret this to include indirect control or participation, so-called “shadow directors” could constitute prescribed officers. Shadow directors are well known in other jurisdictions, and they generally exercise indirect influence or control by way of instructions to a company’s directors who, in turn, are accustomed to acting in accordance with such instructions. However, this excludes professional advisors’ instructions.
Shadow directors are typically encountered in lending scenarios when a bank advances a loan to a borrower client and then negotiates the right to observer status on the client’s board in certain situations, usually default scenarios.
“It seems that even if a prescribed officer excludes directors and alternate directors, the definition is wide enough to include a shadow director, as well as anyone else who participates regularly in managing a company’s business or activities,” said Ms Gerstle.
Whilst the concept of a “prescribed officer” is a new one under the Act and will no doubt be subject to much interpretation by the South African courts in the future, it is important for persons in executive and management positions to be aware that despite not being formally appointed and elected as directors, they could be subject to duties and liabilities under the Act and can, for all intents and purposes, be treated as directors of the company in question.