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Mercantile Law 471 (Topic 6 - Corporate Governance) Summary
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Neat and comprehensive summary of all the coursework prescribed for the final year module, Mercantile Law 471 (Companies).
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TOPIC 6: CORPORATE GOVERANCEBasic principles of corporate governance
- What is corporate governance?
o According to the Cadbury Committee, corporate governance is the system by
which companies are directed and controlled = narrow meaning
o The Organisation for Economic Co-Operation and Development defines
corporate governance involving “a set of relationships between a company’s
management, its board, its shareholders and other stakeholders (e.g.,
employees, creditors, the environment and the community)” = broad
meaning
- The duties imposed on directors and the company is not only found in the
Companies Act, but also in the National Environmental Management At; the King
Code; the JSE Listing Requirements and the common law.
- As we know, companies exist as abstract things which means that is needs natural
persons to actually function (employ employees, buy stationary, etc.). This then begs
the following question: Who are the decision makers in a company?
o The point of departure is that all companies have, as a minimum, two organs:
the shareholders and the directors.
o In larger companies the board of directors will usually also consist of various
sub-committees such as an audit committee, social and ethics committee and
a remuneration committee as well as a CEO.
§ It is often impossible for shareholders in these companies to
participate in the day-to-day management of the company, so they
appoint the board to do so on their behalf and in accordance with
their interests. Furthermore, shareholders would also want to act in
their own self-interest, which is why, for example, is it better to
delegate the power to make distributions to the board who will make
impartial decisions in this regard.
o Accordingly, section 66(1) of the Companies Act provides that the business
and affairs of the company must be managed by the board who has the
authority to exercise all powers and functions of the company except to the
extent that the Act or MOI provides otherwise.
o Can shareholders interfere with management?
§ It is clear from the above provision that the powers of the board may
be limited in the MOI but whether this will actually be done depends
on whether it is a public or a private company.
• In private companies with little shareholders who are also the
board of directors, the line between shareholder and director
is blurred because the shareholders are effectively managing
the company.
• In public companies, where shareholders are investors in the
true sense (have your day job and then you earn a passive
income from shares), you will leave the management of the
company to the board because you just want a distribution at
, the end of the year and if you don’t like your returns, you sell
your shares.
§ Thus, in a public company it is very unlikely that there will be a
limitation on the board’s power in the MOI whereas, in a private
company, it is more likely that more of the powers will be granted to
the shareholders in the MOI because usually this is how the
shareholders earn a living so they will be more involved in the
management of the company.
o So, why would the board generally have more powers than the shareholders
in large public companies?
§ Because if it is a large company, there are likely thousands of
shareholders. Practically, a company would be better managed by a
small board of ten people rather than thousands of shareholders all
trying to further their own selfish interests.
§ Short answer: It will be impractical.
The powers of the shareholders
- Shareholders effectively have two powers in terms of the Companies Act:
1) Section 16(1): Power to amend the MOI with a 75% majority
o But these powers should not be overemphasised, especially when it comes to
public companies where it will be impossible to contact all the shareholders
and get the majority of 75%. Also, there will be different classes of shares
with different voting rights attached to it.
2) Section 71(1): Power to dismiss directors by means of an ordinary resolution
- Powers of shareholders in terms of the MOI?
o The MOI could grant the shareholders the power to interfere in management
decisions but, as we saw above, this would usually only be done in smaller
private companies.
- What about the common law as a source of shareholder powers?
o Under the old act, the power of the board was not contained in the act itself
but rather in a schedule. Thus, the board did not have any default or residual
powers which meant that the powers would automatically vest in the
shareholders.
o However, in terms of the new Act, the power of the board is in the act itself
and it refers to “business and affairs” which is a very broad scope. Thus, it
would be very difficult for shareholders to argue that the act does not grant
the board a specific power and that it should therefore vest in the
shareholders.
o It is therefore debatable whether there are still common law powers of
shareholders.
,Written resolutions
- Must a meeting necessarily be held for the company to pass certain resolutions, or
can they do it informally?
o In a private company you have to give 10 days’ business notice of a meeting
and in a public company you have to give 15 days’ notice. Therefore, you will
have to wait quite a while before you can pass resolutions at the meeting. So,
what if the company urgently needs to pass a resolution?
o Will it be possible to, for example, send a PDF to all the shareholders to sign?
This is obviously a deviation from the act which requires a “meeting” but
what if all the shareholders agree that they don’t want a meeting and rather
circulate a PDF via email?
- Position under the old act
o These informal resolutions were allowed as the courts viewed the MOI as a
contract which can be deviated from if there is 100% consensus between all
the parties (shareholders) to the contract (MOI).
o Criticism: Must have a meeting in terms of the old act and all amendments of
the MOI had to be registered with CIPC.
- Position under the new Act
o Section 62(2A) allows shareholders to call a meeting with less notice than
required by the Act or the MOI, but such meeting may only proceed if
everyone that is entitled to vote at the meeting is (a) present at the meeting
and (b) votes to waive the required minimum notice.
§ But this section still requires a meeting to take place which means
that this section cannot be used to argue that an informal resolution
would suffice. But it does happen in practice if shareholders do not
complain.
o Passing of informal resolutions is regulated by section 60 of the Act
§ Section 60(1) allows a resolution that could be voted on at a
shareholders meeting to be submitted to those shareholders who can
vote on it and the resolution may then be voted on in writing by such
shareholders within 20 business days after the resolution was
submitted to them.
§ Section 60(2) states that a resolution contemplated in subsection (1)
will be adopted if it was supported by the necessary votes to
constitute an ordinary resolution (50%) or special resolution (75%), as
the case may be, at a shareholders meeting and it will have the same
effect as if it had been adopted at such a meeting.
§ This informal way of passing a resolution is therefore done in the
same way as a normal meeting, except everyone is not physically
present at the same place.
• It also differs from the informal way of sending round a PDF in
that it requires 50% if it amounts to an ordinary resolution or
75% if it amounts to a special resolution, whereas this informal
way requires 100% consensus.
, • One problem, however, is that it requires voting within 20
days which is a long time given the urgency usually associated
with making use of this informal way of passing resolutions.
§ Section 60(5) states that business to be conducted at an AGM may
not be conducted in this informal manner. Other than that, you can
vote on essentially anything in this informal manner.
§ See example question in notes
The board of directors
Terminology
- Constitution of the board of directors
o Section 66(2) states that the board of a company must comprise
§ In the case of a private company, or a personal liability company, at
least one director.
§ In the case of a public company, or a non-profit company, at least
three directors.
§ In addition, the company must also appoint an audit committee, or a
social and ethics committee as contemplated in section 72(4).
- Relationship between the board and the MOI
o Section 15(6)(c)(i) states that the MOI or the rules of the company are
binding between the company and each director/prescribed officer.
o The MOI is therefore a contract between the company and the directors, but
can any time be amended by the shareholders.
- Sources that regulate the relationship between the directors and the company:
a) The MOI (contract)
b) The common law
o Sets out the fiduciary duties of the directors which is now also codified in
sections 75 and 76 of the Act
c) Contract of employment between the company and an executive director
d) Section 66(1) of the Act which confers them the powers to manage the business
and affairs of the company
e) Other environmental legislation, King Code for listed companies and the JSE
listing requirements
- Therefore, due to the variety of sources, the relationship between the company and
the board can be described as sui generis.
- Who is a director?
o Section 1 states that a director includes a member of the company’s board,
an alternate director and “any person occupying the position of a director or
alternate director, by whatever name designated”.
o The latter part of this definition refers to so-called de facto directors who do
not actually have the title of director but nevertheless exercise powers that
one would associate with a director.
o But who will be such a de facto director is not necessarily clear because one’s
mind immediately turns to a CEO (do not have “director” in its title but
nevertheless exercise powers associated with directors by managing the
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