- Many private companies in South Africa, especially in the SME market, are traditionally owned and managed by the same individuals. With the increase in black ownership transactions as part of B-BBEE compliance initiatives by businesses, the share ownership structures of many of these private companies have now changed, raising the issue of shareholder participation in the management of the business of a private company.
- In this article we consider what the Companies Act (2008) states about the management of the business and affairs of a private company.
- WHO MUST MANAGE A COMPANY IN TERMS OF THE COMPANIES ACT (2008)?
- In terms of Section 66(1) of the Companies Act (2008), the business and affairs of a company must be managed by or under the direction of its board of directors, which has the authority to exercise all of the powers and perform any of the functions of the company, except to the extent that the Companies Act (2008) or the company’s Memorandum of Incorporation provides otherwise.
- To ensure that the board of a company carries out this management responsibility in a proper manner, each director of a private company is subject to several statutory fiduciary duties recorded in Section 76(2) and 76(3) of the Companies Act (2008) as well as common law fiduciary duties. These fiduciary duties, amongst others, include the duty to not use the position of director, or any information obtained while acting in the capacity of a director to gain an advantage for the director or to knowingly cause harm to the company; the duty to exercise the powers and perform the functions of director in good faith and for a proper purpose, in the best interests of the company; and the duty to act with the degree of care, skill and diligence that may reasonably be expected of a person carrying out the same functions and with the general knowledge, skill and experience of that director.
- A breach by a director of its fiduciary duties could result in personal liability claims against that director in terms of Section 77 of the Companies Act (2008).
- DOES A SHAREHOLDER HAVE THE RIGHT TO TAKE PART IN THE MANAGEMENT OF A COMPANY?
- Each holder of a share in a company has attached to such share (subject to any specific share class rights and any restrictions contained in the Memorandum of Incorporation of the company), the following basic rights:
- the right to vote on any matter that the holders of the company’s shares are entitled to vote on;
- the right to receive a distribution (dividend) in respect of the shares held by such a shareholder; and
- the right to receive a distribution (dividend) of the residual value of the company upon its liquidation.
- To protect the rights and interests of shareholders in a company, Section 65(11) of the Companies Act (2008) requires shareholder approval by means of a special resolution (normally this would be at least 75% of the voting rights of shareholders exercised on the resolution) before the board may implement certain important actions or transactions, including the amendment of the company’s Memorandum of Incorporation; the ratification of actions by the company or directors in excess of their authority; to authorise the board to grant financial assistance to a director or a related person; to authorise the basis for compensation to directors of a profit company, as required by Section 66(9); to approve the voluntary winding up of the company; and to approve any proposed fundamental transaction, to the extent required by Part A of Chapter 5 of the Companies Act (2008).
- In terms of Section 165(12) of the Companies Act (2008) a company’s Memorandum of Incorporation may also require a special resolution to approve any other matter not contemplated in Section 65(11).
- Unlike a director of a company, a shareholder therefore does not have any right or authority to directly take part in the day-to-day management of the business and affairs of a company. It is also important to note is that a shareholder of a company has no fiduciary duty towards the company or its stakeholders and has the liberty to exercise its voting rights as a shareholder for its own interest only, with no statutory duty to act in the best interests of the company and its other stakeholders.
- DOES A SHAREHOLDER HAVE REMEDIES IF IT IS DISSATISFIED WITH BOARD DECISIONS OR ITS RIGHTS OR INTERESTS ARE NEGATIVELY AFFECTED BY BOARD DECISIONS?
- If a shareholder is dissatisfied by the manner in which the business and affairs of a company is managed by the board of directors, or if its rights or interests are prejudiced by the actions taken by the board, it may have some remedies available to it under the Companies Act (2008), including the following:
- the right to remove a director in terms of Section 71 of the Companies Act (2008) by an ordinary resolution of the shareholders (this is normally a vote supported by more than 50% of the voting rights exercised on the resolution);
- the right to apply to a court in terms of Section 161 of the Companies Act (2008) to determine the rights of the shareholder under the Companies Act (2008) the company’s Memorandum of Incorporation, or to apply to a court for an appropriate order to protect any of the shareholder’s rights or to rectify any harm done to that shareholder by any act of the board to the extent that they may be held liable in terms of Section 77 of the Companies Act (2008);
- the right to apply to a court to declare a director delinquent in terms of Section 162 of the Companies Act (2008);
- the right to apply to a court in terms of Section 163 of the Companies Act (2008) for relief if the powers of a director, or prescribed officer of the company, or a person related to the company, are being or have been exercised in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, the shareholder;
- the right to exercise its shareholder appraisal right under Section 164 of the Companies Act (2008); and
- the right to commence or continue with legal proceedings, or related steps, to protect the legal interests of the company (also known as a derivative action) in terms of Section 165 of the Companies Act (2008).
- HOW DOES A SHAREHOLDER EXERCISE ITS VOTING RIGHTS IN A PRIVATE COMPANY?
A shareholder of a company can exercise its voting rights at a duly constituted shareholders meeting (either in person or by proxy), or where permitted in terms of the company’s Memorandum of Incorporation, through electronic participation in the shareholders meeting (Section 63(2) of the Companies Act (2008)) or by way of a round-robin resolution (Section 60(1) of the Companies Act (2008)) where the board submits such a resolution to shareholders for voting.
- MUST A COMPANY HAVE A SHAREHOLDERS MEETING AT LEAST ONCE A YEAR?
- In terms of Section 61(7) of the Companies Act (2008), only a public company is compelled to hold an annual general meeting of its shareholders.
- In terms of Section 61(2) of the Companies Act (2008), a private company only has the obligation to hold a shareholders meeting at any time that the board is required by the Companies Act (2008) or the Memorandum of Incorporation to do so.
- If there is therefore no specific matter that the Companies Act (2008) requires a company’s shareholders to meet about in a financial year or the Memorandum of Incorporation does not require the shareholders of the company to meet at least annually, the shareholders of the company will have no obligation to meet annually or to vote any particular matter.
- Although shareholders therefore inter alia have the right to vote on fundamentally important matters that could affect their rights and interests in the company, to remove directors and to rely on statutory protection and relief measures under the Companies Act (2008), the right to manage the day-to-day business and affairs of the company will vest in the board, not the shareholders.
- Although it may be a good corporate governance practice to hold at least one shareholders meeting per annum, a private company will not be compelled to do so unless its Memorandum of Incorporation specifically requires otherwise.
For assistance with any aspect of your shareholder relationship or company, feel free to contact our experienced team of lawyers to assist you in taking the right actions at the right time to protect you.
LLB; LLM (Import/Export Law)
Corporate and Commercial Law
Phone: 012 361 9823