Commercial Attorneys

Responsibilities of Directors

​Directors run the company on a day-to-day basis. They are empowered by virtue of appointment by the Shareholders to make decisions. 

 

Directors have the right to:

• Management - running the day-to-day operations of the company.

• Participation - to attend and participate in board meetings.

• Information - access to company records.

• Payment - compensation for their services.

• Indemnification - meaning that a director's actions on behalf of a company are assumed to be those of the company, and the director is not personally liable for failures - unless it can be proved that the director was not acting in good faith, breached fiduciary duties or treated the company as an extension of themselves (i.e. not a separate legal entity) - see our article on "The Corporate Veil and Liability of Company Directors" here. 

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Directors' responsibilities are to:

• make important decisions for the good of the company, at board level - such as hiring of staff and service providers, financial decisions, and dealing with complaints;

• exercise their functions in the best interests of the company and with the requisite degree of care, skill and diligence (Section 76(3) of the Companies Act No. 71 of 2008),

• exercise reasonable care, skill and diligence expected of someone at a directorship level,

• oversee and monitor, on an ongoing basis, how the consequences of an organisation’s activities and outputs affect its status as a responsible corporate citizen (King IV Report 3(14),

• declare interests in proposed or existing transactions or arrangements with the company.

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Rights of Shareholders

• Shareholders are the real owners of the company. Shareholders appoint Directors as day-to-day managers of the company, but all the really important decisions are made by the Shareholders (depending on the size of the company).

• Right to share in the company's assets: Most importantly, Shareholders are entitled to dividends in the company (provided it is making profit and declaring dividends) as reward for their investment and effort.

• Right to vote: Shareholders have the right to call meetings, attend, vote at and speak at meetings, either by themselves or proxy, and to table and pass resolutions concerning many aspects of the company (provided they can amass a majority vote).

• Pre-emptive Rights: Shareholders usually have the right to be offered and purchase shares by other Shareholders wishing to sell their shares.

• Right to Inspect Company Records: Shareholders have the right to inspect certain company records, including the register of shareholders, minutes of meetings, and other documents related to the governance of the company.

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Responsibilities of Shareholders

• As owners of the company, Shareholders enjoy more in the way of rights than responsibilities. Shareholders do not usually owe a fiduciary responsibility of care and trust to a company - that burden rests upon directors - although, there is developing case law which seems to recognise some fiduciary responsibility by Shareholders.

• Shareholders are not inherently prohibited from holding shares in competing companies. For example, a Shareholder may hold shares in two competing biotech companies. Such a situation could theoretically be averted by an appropriate provision in the Shareholder's Agreement.

• Shareholders can however be said to have some responsibilities:

  • Duty to minority Shareholders: Majority Shareholders are required by the Companies Act, and usually the Shareholders Agreement, to act in good faith and avoid actions that unfairly prejudice the rights and interests of the minority shareholders.

  • Duty to exercise financial and  corporate oversight: Shareholders are typically responsible for capital contribution, determining strategy and control of the company by way of vote, reviewing financial statements and bearing the risk associated with their investment in the company if it performs poorly.

  • Contractual Obligations: In some cases, shareholder agreements may impose specific duties on shareholders, including fiduciary-like obligations. These are contractual in nature and not automatically imposed by law.

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Is a Director an employee of the company?

• Not necessarily. It depends on whether the Director is an Executive Director or a Non-Executive Director. Paragraph (g) of the definition of an employee in Fourth Schedule to the Income Tax Act defines a director of a private company as an employee. CIPC however gives you the option when appointing a director to define the director as an employee, or not. Please contact us for advice on your specific situation.​

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Is a Shareholder an employee of the company?

• Not by virtue of being a Shareholder, no. It often happens (especially with startups and small companies) that the incorporator of the company is both sole Director and 100% Shareholder.​

• But, as you can imagine, you can buy shares in a company and become a Shareholder, but that does not make you an employee.

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How are directors appointed? - Appointment and Removal of Directors

• Appointment of a director flows from mandate derived from a resolution passed by a majority of shareholders at a properly-constituted meeting.

• For smaller companies, this is not usually done, because essentially the founder of the company is sole director and 100% shareholder.

• Similarly, removal of directors is conducted at the pleasure of shareholders - by way of a valid majority resolution.

• See the interesting matter of S v F 2023 which our firm continues to litigate, whereby an opposing faction claimed to have been appointed as directors by a different mechanism.​​

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S v F 2023 and the technicalities of appointing Directors

• In a recently published case in which we represented directors appointed by way of AGM, an opposing faction claimed directorship by way of appointment by previous outgoing directors.

• The case raises questions about the authority of directors vs shareholders - who has the power to appoint directors? See Who's pulling the strings? below.

• The case is currently set for argument in the Supreme Court of Appeal in August 2024.

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How are Shareholders appointed and removed?

• It must be understood, and we specifically included this section, to make a point - a company does not appoint Shareholders, because Shareholders do not answer to a company - the company must answer its Shareholders. They are its investors and owners, and the company is their machine that exists to make them money.

• Shareholders are added to a company usually by purchasing shares in return for cash, or otherwise in return for "sweat equity" - effectively a promise to work hard at growing the company using their skills.

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• Shareholders are not "removed" from ownership. We are often approached by clients (usually the majority shareholders in a company) who have a dispute with other Shareholders and wish to remove those Shareholders from the company. Note that a share is an asset, albeit an intangible one*, which is owned by the Shareholder. A Shareholder cannot just be "removed" from ownership.

* Intangible assets include shares and other securities, patents, software and trademarks.

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What are the risks of being a Director?

Directors must act in the best interests of the company and its shareholders, adhering to their fiduciary duties of care, good faith and skill. Breach of fiduciary duty can result in personal liability or even criminal liability.

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What are the risks of being a Shareholder?

Mainly, financial risk - i.e the loss of one's investment should the company fail. 

As a general rule, shareholders do not owe a fiduciary duty to the company when exercising their rights and powers, but in certain circumstances they also be held liable for the debts of the company, most importantly its tax debts to SARS - or personal liability to creditors, if the interests of creditors have been disregarded.

 

Does my company have to have Directors or Shareholders?

​Yes. Although some new company owners don't realise it, every company has Shareholders - the person who incorporates the company is usually the 100% Shareholder.

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Technically, share certificates and a securities register should still be created - read more about the paperwork here.​​​​​​

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