5 March 2009

South Africa: New Law Will Put Company Directors in Firing Line

Johannesburg — COMPANY directors face enormous exposure for personal liability if they do not do their jobs properly in terms of new legislation.

"The Companies Act will see the introduction of new legal weapons into the arsenal of stakeholders' rights, which are far more powerful then they ever had before," Carl Stein, a commercial partner at Bowman Gilfillan Attorneys, said yesterday.

The new Companies Act would drastically change the law, the scope and procedure in relation to class and derivative actions, all in favour of shareholders and other stakeholders, said Stein.

"Undoubtedly, the result will be that directors and officers of companies will be far more exposed to the threat of derivative actions and, as a result, personal liability," he said.

The trend in the US, and more recently in the UK, towards more aggressive shareholder activism seems likely to be followed in SA once the new act becomes operative.

Until now, South African shareholders had been able to curtail the powers of boards of directors of public companies by, for example, voting against the annual shareholders' resolution to issue shares for cash.

However, these actions had been little more than irritants to directors, who were shielded by the old Companies Act, which was "toothless" when it came to the powers and remedies available to minority shareholders and stakeholders, said Stein.

However, this was about to change with the introduction of a class action and a derivation action once the new act was passed into law.

The class action could be exercised by a person acting as member of a group or class of affected people.

On the other hand, the derivative action was more complex, explained Stein. Where a company had suffered loss, it was usually the board that had the power to take remedial action. However, a shareholder would be able to apply to court for an order on a company's behalf in limited circumstances to force the directors to take legal action. "This is known as the derivative action," said Stein.

Stein said that the new derivative action would be extremely broad in certain respects.

First, a number of people might initiate the proceedings: a shareholder of the company; a director of the company or related entity; a registered trade union or another representative or the company's employees; or a person who has been granted leave of the court to do so.

Stein said that the obvious target for stakeholders when things went wrong for a company was its board of directors. He posed as an example a situation win which a company decided to retrench some of its employees because it had suffered losses as a result of a board decision to invest in a new business that later proved to be ill-considered.

The new derivative actions would permit the trade union representing those employees to demand that the company sue all or any of its directors who participated in that decision in their personal capacities for breach of their duties to the company.

"All the trade union need show is that there may be some merit to the allegation that those directors did not do their jobs properly," he said.

Second, the scope of the derivative action was broadened in that legal proceedings could be taken against anyone in the company, not just its directors or officers, as is now the case, Stein said.

Third, the scope of the derivative action was also broadened in that it might be brought to "protect the interests of the company". The word "interests" sent shivers down the spines of lawyers who advised big business because the courts had consistently given a very wide interpretation to this word, warned Stein.

He said that all a person had to do to commence derivative proceedings was simply serve a demand on the company.

The new Companies Act is expected to be passed into law next year.

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