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LML4806
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Lecture notes of 16 pages for the course COMPANY LAW LML4806 at Unisa (LML4806)
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LML4806Week two discussion forum question
Learning unit 2
Please study the learning unit and answer the following questions. Follow
the guidelines of answering questions below.
1. Thimmy is a newly appointed director at Thexware Ltd. During a general
meeting of shareholders, it emerged that Thimmy was removed from the
position of a director at TMT Ltd (‘TMT’). The removal was based on the
ground that he lied to the board of directors at TMT about the quality of
the land that the company wanted to acquire for development. As a
result of Thimmy’s action, TMT decided not to acquire the land and, in
the process, lost an amount of R30 000 000.
When he was appointed as a director at Thexware Ltd, Timmy did not
disclose his removal from the position of a director at TMT. The
shareholders of Thexware Ltd approach you for advice.
1. 1With reference to the Companies Act 71 of 2008 and the
facts, advise the shareholders of Thexware Ltd whether
Thimmy’s appointment as a director is valid.
(6)
2. Suppose Timmy argues that the he committed the misconduct
at a different company that has nothing to do with Thexware
Ltd and a year has passed since his removal from the board of
directors at TMT. With reference to the Companies Act 71 of
2008 and the facts, advise the shareholders of Thexware Ltd
whether Timmy’s argument valid. (4)
End of question
Method of answering the problem type questions.
Try to first provide and explain the applicable theory as provided in
the relevant statute and case law if any.
Then carefully apply the theory to the facts in the question. (apply
the law/theory to all the important facts in the scenario)
And provide conclusion (answer the question)
Memorandum for learning unit 2 question
LML4806
Question 1.1
Theory
In terms of section 69 (2) (a) of the Companies Act 71 of 2008, a person
who is ineligible or disqualified as set out in this section must not be
, appointed or elected to be a director and must not act as a director of the
company. (1)
In terms of section 69 (8) (b) (iii) of the Companies Act 71 of 2008, a
person is disqualified to be a director of the company if subject to
subsections (9) to (12), the person has been removed from an office of
trust on the grounds of misconduct involving dishonesty. (1)
Application of the theory to the facts
Thimmy was removed from the position of a director at TMT on the
ground of misconduct involving dishonesty. (1)
This means that in terms of section 69(8) (b) (iii), Thimmy is disqualified to
be a director of a company. (1)
In terms of section 69 (2) of the Act, Thimmy must not be appointed or
elected or consent to act as a director of the company. (1)
Thus, his appointment to act as a director at Thexware Ltd is invalid. (1)
Question 1.2
Theory
In terms of section 69(9) of the Companies Act 71 of 2008, a
disqualification due to the removal from office for misconduct involving
dishonesty in terms of 69 (8) (b) (iii) ends at the later of the five years after
the date of removal or the completion of the sentence imposed for the
relevant offence. (1)
Alternatively, if extensions were granted, at the end of an extension from
time to time as determined by the court on application by the
commission. (1)
Application of the theory
In the facts, although Timmy committed the misconduct at a different
company, five years has not passed since he was dismissed at TMT. (1)
Thus, his argument is not valid. (1)
See section 69 of the Companies Act 71 of 2008, See section 12.11.5
of the textbook and para 2.6 of the study guide.
Study Unit 3
Question
Tshepo is the director of Healthyheart Ltd, a company that manufactures
cholesterol medication. One of Tshepo’s functions is to manage the company’s
distribution of manufactured products to its clients. In September Tshepo
requested information from the company's various factories on the demand for the
company's products during the preceding year, as well as the projected demand
for its products in 2019. It was reported that the demand in 2019 would probably
not exceed the demand during 2019, because a patent for one of the company’s
most profitable cholesterol products would prescribe in December 2018.
, As a result of this information, Tshepo did not make provision for any extension of
Healthyheart Ltd’s distribution network. In November 2018 one of Healthyheart
Ltd’s main competitors lost all its manufacturing plants due to an explosion.
Consequently, the demand for Healthyheart Ltd’s products rose substantially and
the distribution network could not meet this demand. Healthyheart Ltd had to
make use of outside contractors to extend distribution, which led to lower profits.
The board of directors of Healthyheart Ltd wants to institute action against Tshepo
for breach of his duty of care and skill.
Advise the board of directors on the company’s chances of success, keeping in
mind the common law, relevant case law and the provisions of the Companies Act
71 of 2008.
In your answer you must also include a discussion of the business judgement
rule. (15)
Answer to the Question:
A director’s duty of care and skill has its origin in the common law. In Fisheries
Development Corporation of SA Ltd v Jorgensen [1980 (4) SA 156 (W)] the
concepts of care and skill were examined. The court held as follows:
i. The required degree of care and skill to a large degree depends on the
nature of the company’s business and the specific duties assigned to the director.
A distinction must be drawn between executive and nonexecutive directors in the
sense that a nonexecutive director is not expected to give continuous attention to
the affairs of the company.
ii. It is not expected of a director to have special expertise or experience.
What is expected is that the director exercises the degree of skill and care one
could reasonable expect from a person with his or her knowledge and experience.
Directors are not liable for mere errors of judgment.
iii. A director may rely on other officials and management unless there are
reasons for questioning the judgment of such officials or management. A director
must however still give due regard and exercise his or her own judgment in doing
so.
Remedies against a breach of the duty of care and skill may be based on contract
if a contract was concluded between the company and the director. Alternatively,
a delictual claim for damages exists. In order to claim for delict, obviously all the
requirements must be proven.
Section 76 of the Companies Act of 2008 has partially codified the duty of care
and skill and provides that the director must exercise that degree of care, skill and
diligence that may reasonable be expected of a person carrying out the same
functions in relation to the company as those carried out by the director.
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