Corporate Governance - ENS

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Corporate Governance - ENS

®Corporate GovernanceBoard structures and directors’ dutiesin 38 jurisdictions worldwideContributing editors: Ira Millstein and Holly Gregory2010Published byGetting the Deal Throughin association with:Anderson Mōri & TomotsuneAraújo e Policastro AdvogadosArfat Selvam Alliance LLCArzingerBadri and Salim Meouchi Law FirmBeiten BurkhardtBofill Mir & Álvarez Hinzpeter JanaBonn Schmitt Steichenbpv | Jádi Németh Attorneys at LawCentral LawCHSH Cerha Hempel Spiegelfeld HlawatiDavies Ward Phillips & Vineberg LLPDavis Polk & Wardwell LLPDe Marchena Kaluche & Asociados Central LawEdward Nathan Sonnenbergs IncHenrique Abecasis, Andresen Guimarães, Pedro Guerra &Álvaro Roquette Morais Sociedade de Advogados RLJuric & PartnersKaranović & Nikolić Law OfficeKluge Advokatfirma DAMacchi di Cellere GangemiMah-Kamariyah & Philip KohMedina, Rosenthal & Fernández, Central LawMolina & Asociados Central LawNomos Law FirmPopovici Niţu & AsociaţiiQuiros Abogados Central LawRosselló AbogadosRusconi, Valdez, Medina & Asociados Central LawS A Evangelou & Co LLC affiliated with LandwellSalaberren & López SansónSánchez-DeVanny Eseverri, SCSchellenberg WittmerSimmons & SimmonsSlaughter and MaySomay Hukuk BürosuStreamsowers & KöhnVivien & AssociésWeil, Gotshal & Manges LLPYukov, Khrenov and Partners


Edward Nathan Sonnenbergs Incsouth africaSouth AfricaMohamed Sajid Darsot and Anli DowlingEdward Nathan Sonnenbergs IncSources of corporate governance rules and practices1 Primary sources of law, regulation and practiceWhat are the primary sources of law, regulation and practice relating tocorporate governance?Legislation• The Companies Act, 61 of 1973 (as amended) (the Act);• the Companies Act, 9 of 2008 (the New Act), which is to repealthe Act in the near future. The New Act has been promulgated,but will only come into force on a date to be fixed by the president,which is expected to be during the last quarter of 2010.The New Act will effect significant changes to the regulation ofcompanies and, to a certain degree, to corporate governance inSouth Africa;• the Securities Regulation Code on Takeovers and Mergers (theCode), established pursuant to the Act. The Code enjoys the forceof law and is a codification of acceptable standards of commercialbehaviour. It operates principally to ensure fair and equaltreatment of all holders of securities in relation to transactionsand schemes that constitute ‘affected transactions’, as defined inthe Code; and• the JSE Listings Requirements (the Listings Requirements), promulgatedin terms of the Securities Services Act, 36 of 2004 (theSSA), which apply to all companies whose securities are listed onthe JSE Limited, a licensed exchange under the SSA (the JSE), orthat seek to have their securities listed on the JSE.Other sources• Common law (based on Roman-Dutch law and influenced byEnglish law);• under the Act, a company’s memorandum of incorporation(memorandum) and articles of association (articles). Under theNew Act, a company’s memorandum of incorporation (MOI)will replace, and incorporate elements of, the memorandum andarticles of a company; and• the Third King Report on Corporate Governance for SouthAfrica 2009 (the King Code), contains codes of corporate practicesand conduct. In contrast to both the First and Second KingReports on Corporate Governance, the King Code, which cameinto effect on 1 March 2010, applies to all entities, regardless oftheir manner and form of incorporation or establishment. The King Code follows an ‘apply or explain’ governanceframework. Save to the extent that application of the King Codeis mandated by law or regulation (eg, listed companies are contractuallybound to adopt the principles of the King Code interms of the Listings Requirements), adherence to the King Codeis voluntary and there is no sanction for non-compliance.2 Responsible entitiesWhat are the primary government agencies or other entitiesresponsible for making such rules and enforcing them? Are there anywell-known shareholder activist groups or proxy advisory firms whoseviews are often considered?The Department of Trade and Industry is responsible for the draftingand promulgation of the Act and the New Act, as well as theenforcement thereof (together with the registrar of companies (theregistrar)).Other entities responsible for enforcement include the JSE ListingsCommittee, which is tasked with enforcing the Listings Requirements,and the Securities Regulation Panel, which enforces the Code.Once the New Act comes into force, the Securities Regulation Panelwill be substituted with the Takeover Regulation Panel, an independentorgan of state.The King Commission is responsible for drafting and updatingthe King Code. The King Code relies on self-regulation and there isno sanction for non-compliance. However, the Listings Requirementsrequire a listed company to disclose, in its annual report and annualfinancial statements, how it has applied the principles of the KingCode, the extent of the company’s compliance with the King Codeand the reasons for non-compliance. In addition to the aforementioneddisclosure, a listed company must also comply with a numberof specifically itemised requirements in the King Code, and must discloseits compliance therewith in its annual report. If the companydoes not comply with such specific requirements, the JSE ListingsCommittee has the power to suspend or terminate such company’slisting of its securities or impose a fine on the company.South Africa does not have any prominent shareholder activistgroups or proxy advisory firms. However, in recent years the PublicInvestment Corporation Limited (PIC), a company wholly owned bythe South African government and which manages the investmentsof, among others, government employees’ pension funds, has takena more active role in dealing with issues relating to corporate governanceand transformation (specifically in regard to black economicempowerment). Large institutional shareholders have also, in the pastfew years, adopted a more active stance in assessing the corporategovernance practices of companies listed on the JSE.The rights and equitable treatment of shareholders3 Shareholder powersWhat powers do shareholders have to appoint or remove directors orrequire the board to pursue a particular course of action?The articles of a company generally provide for directors to beappointed by way of an ordinary resolution adopted at a general meeting.This is also the method prescribed by the Listings Requirements,in relation to the appointment of directors of listed companies.The articles of a company usually also provide that, in the caseof a casual vacancy, the board shall appoint a director, subject to thewww.gettingthedealthrough.com 215


south africaEdward Nathan Sonnenbergs Incapproval of the shareholders at the ensuing annual general meetingof the company.The New Act provides that a company’s MOI may provide forthe direct appointment and removal of any directors by any personwho is named in the MOI. In the case of a profit company (as definedin the New Act), other than a state-owned company, the company’sMOI must provide for the election by shareholders of at least 50 percent of the directors and alternate directors of a company.Both the Act and the New Act enable the shareholders in generalmeeting to remove a director by ordinary resolution before the expirationof his period of office. This power is given to shareholders,notwithstanding anything to the contrary in the articles or MOI ofthe company or any agreement between the director and the company.The Act and the New Act prescribe similar procedures for suchremoval, entailing, inter alia, the serving of notice on the director andproviding the director with a right to make representations.The King Code suggests that the board of a company should bepermitted to remove any director without shareholder approval.In regard to whether shareholders have the power to requirethe board to pursue a particular course of action, the articles of acompany typically provide that control of a company’s affairs vestsin its board, and not in its shareholders. Shareholders may, however,request that a general meeting of the company be convened (subjectto compliance with the requirements set out in the Act), at whichmeeting they may, whether in person or in proxy, submit proposalsregarding a particular course of action.• amendments to the MOI of the company;• the ratification of an act by the company or its board outside theauthority of the MOI;• fundamental transactions, including schemes of arrangement andamalgamations and mergers;• the provision of financial assistance in respect of the acquisitionof the company’s own shares;• the remuneration of directors, save as determined in the MOI;• the issue of shares to directors, future directors, related or interrelatedparties or nominees;• the issue of shares that result in an increase of 30 per cent ofexisting voting rights; and• any other matter requiring a special resolution, as stipulated inthe MOI of the company.In respect of listed companies, the Listings Requirements requireshareholder approval in relation to, inter alia, the following:• the implementation of category 1 transactions, which are transactionswhere the percentage ratio of the size of the transactionrelative to the size of the company proposing to implement thetransaction is 30 per cent or more;• transactions between the company and a ‘related party’, asdefined in the Listings Requirements;• any share option schemes or share incentive schemes proposedto be implemented by the company; and• the delisting of the company.4 Shareholder decisionsWhat decisions must be reserved to the shareholders?The Act provides that at every annual general meeting the companymust, by way of an ordinary resolution (passed by a simple majorityof shareholders present and entitled to vote), appoint an auditor tohold office until the next annual general meeting of the company.Under the Act, certain corporate decisions call for a specialresolution (which require, inter alia, the approval of at least 75 percent of the shareholders present and entitled to vote at the meeting),including:• the conversion of one type of company into another type ofcompany;• the granting of financial assistance by the company for the purchaseof, or subscription for, shares in the company or its holdingcompany;• any change to the name of the company;• amendments to the memorandum or articles of the company;• any alteration to the share capital and shares of the company;• the issue of shares at a discount;• the acquisition by the company of its own shares;• the conversion of shares into stock;• payments to directors for loss of office in connection witharrangement and take-over schemes;• the provision of loans to, or security on behalf of, directors ormanagers;• the authorisation of a share option plan in which directors areinterested;• an offer of share options to directors;• the disposal by the company of the whole, or substantially thewhole, of its undertaking or the greater part of its assets;• the removal of the company’s auditors;• an alteration to the powers and the objects of the company; and• the voluntary winding-up of the company.Under the New Act, a special resolution (which require, inter alia,the approval of at least 75 per cent (or a lesser percentage, if so determinedby the company’s MOI) of the voting rights exercised on suchresolution) will be required for the following corporate decisions (inaddition to, or in replacement of, those listed above):5 Disproportionate voting rightsTo what extent are disproportionate voting rights or limits on theexercise of voting rights allowed?Both the Act and the New Act allow the share capital of private andpublic companies to comprise of different classes of shares with differentrights attaching thereto, including low or high voting rights.In the context of listed shares, however, the JSE no longerapproves the listing of shares holding disproportionate voting rights,although the JSE is allowing the continued listing of such shares,provided such shares had been listed prior to October 2000.In addition, the articles of a company may provide that preferenceshares issued by it shall not carry the right to vote at a meetingof the company, provided that the holder of such shares shall beentitled to vote in the event that dividends remain in arrears andunpaid, or in regard to any resolution that directly affects any ofthe rights attached to such shares. The JSE also permits the listing ofpreference shares.6 Shareholders’ meetings and votingAre there any special requirements for shareholders to participate ingeneral meetings of shareholders or to vote?The Act, New Act and Listings Requirements provide that an ordinaryshareholder can attend, speak and vote at any meeting of theshareholders of the company, either in person or by proxy if suchshareholder is not present. The articles of a company typically prescribethe formalities relating to proxies.The articles of a company usually prescribe the form of the instrumentappointing a proxy and generally provide that such instrumentand the requisite power of attorney or authority must be deposited atthe registered office of the company not less than 48 hours before thetime for holding the meeting. A proxy need not be a member of thecompany, and a proxy to vote at a meeting shall be deemed to alsoconfer authority to demand or join in demanding a poll.The New Act provides that before any person may attend orparticipate in a shareholders meeting, he or she must present reasonablysatisfactorily identification, and the person presiding at themeeting must be reasonably satisfied that the right of the person toparticipate and vote (either as a shareholder or as a proxy) has beenreasonably verified.216 Getting the Deal Through – Corporate Governance 2010


Edward Nathan Sonnenbergs Incsouth africaThe requirements relating to quorums for shareholder meetingsare governed by the Act and the New Act. The articles of a companymay, however, increase the requirements of a quorum.7 Shareholders and the boardAre shareholders able to require meetings of shareholders to beconvened, resolutions to be put to shareholders against the wishesof the board or the board to circulate statements by dissidentshareholders?The Act provides that a general meeting may be called by two ormore shareholders holding not less than 10 per cent of a company’sissued share capital, or in the case of a company not having a sharecapital, by not less than 5 per cent in number of the shareholders ofthe company. If this is prohibited by the articles of a company, theshareholders of such company may requisition a general meeting,subject to compliance of the minimum requirements set out in theAct. Such requisition must be effected by at least 100 shareholdersof the company or shareholders holding, at the date of lodging of therequisition, at least 5 per cent of the capital carrying voting rights atgeneral meeting of the company.Subject to compliance with the minimum requirements set outin the Act and the articles of the company, shareholders may proposea motion and make a statement regarding such motion or anyother business to be dealt with at a general meeting of the company,in which case the company is obliged to circulate a notice of suchintended motion and any such statements to all the shareholders ofthe company entitled to receive notice of any general meeting of thecompany.The New Act provides that any two shareholders of a companymay propose a resolution concerning any matter in respect of whichthey are each entitled to exercise voting rights. When proposing aresolution, they may require that the resolution be submitted toshareholders for consideration.8 Controlling shareholders’ dutiesDo controlling shareholders owe duties to the company or to noncontrollingshareholders? If so, can an enforcement action againstcontrolling shareholders for breach of these duties be brought?Shareholders (including controlling shareholders) do not owe anyduties to the company or to other shareholders of the company.Protection mechanisms are, however, available to non-controllingshareholders. For example:• in certain instances, special resolutions are required to approveproposed corporate activities;• the Act protects non-controlling shareholders by entitling anyshareholder of a company to apply to a court for relief on thegrounds that a particular act or omission of the company isunfairly prejudicial, unjust or inequitable, or that the affairs ofthe company are being conducted in a manner that is unfairlyprejudicial, unjust or inequitable to such shareholder or to somepart of the shareholders of the company. The New Act containsa similar remedy;• under the common law, one or more aggrieved minority shareholdermay bring a derivative action on behalf of the companyagainst any wrongdoers (including the controlling shareholdersof the company) in order to enforce the company’s rights. TheAct only provides for a derivative action against the directorsor officers of the company and not against the shareholders ofthe company. However, the New Act abolishes and replaces thecommon law derivative action by providing that any shareholder,director or prescribed officer of the company or a related company,trade union representing the employees of the companyor any other person who has been granted leave by the court todo so, may serve a demand upon the company to commence orcontinue legal proceedings to protect the legal interests of thecompany and may apply to court for leave to bring or continueproceedings on behalf of the company if the company fails to doso; and• in addition, a shareholder will always be able to institute a personalaction under the common law to enforce his or her ownrights for direct harm done to such shareholder.9 Shareholder responsibilityCan shareholders ever be held responsible for the acts or omissionsof the company?In principle, a company is a separate legal entity and shareholders cannotbe held responsible for any acts or omissions of the company.The Act, however, provides that any person (including a shareholderof a company) who is knowingly a party to the carrying onof the business of the company in a manner that is reckless or withthe intent to defraud creditors of the company or for any fraudulentpurpose, may be personally liable, without any limitation of liability,for all or any of the debts or other liabilities of the company, if acourt makes an order to such effect on application of, inter alia, anycreditor or shareholder of the company. Such a person will also beguilty of an offence.The New Act contains similar provisions.Corporate control10 Anti-takeover devicesAre anti-takeover devices permitted?Cross-directorships and cross-shareholdings between companies arepermitted under the Act, provided, of course, that in the context ofcross-shareholdings between two companies, neither company mayhold more than 50 per cent of the issued shares in the other company.Furthermore, both the Act and the New Act provide that a subsidiary,as defined, may acquire shares in its holding company, upto a maximum of 10 per cent of the aggregate issued shares of theholding company.Pyramid companies are furthermore allowed by both the Actand the New Act. The Listings Requirements, however, prohibit thelisting of pyramid companies – unless such company is the result ofan unbundling or partial unbundling transaction (subject to certainrequirements). The Listings Requirements do, however, allow crossshareholdingsand cross-directorships.It should be noted that the Code restricts frustrating actions bythe board of an offeree company in the course of a takeover. TheCode provides that, except in pursuance of a contract entered intoearlier, the board of a company may not during the course of an offer,(or even before the date of the offer if the board has reason to believethat a bona fide offer might be imminent), without the approval ofthe holders of the relevant securities in general meeting, take certainactions, for example enter into contracts otherwise in the ordinarycourse of business.11 Issuance of new sharesMay the board be permitted to issue new shares without shareholderapproval? Do shareholders have pre-emptive rights to acquire newlyissued shares?Issue of sharesThe Act provides that the directors of a company shall not havethe power to allot or issue shares without the prior approval ofthe shareholders in general meeting. Such approval may be in theform of a general authority to allot or issue shares in the board’sdiscretion. The authority conferred upon the board is valid until theensuing annual general meeting, but may at any time be varied orrevoked by the shareholders at a meeting held prior to the ensuingannual general meeting.www.gettingthedealthrough.com 217


south africaEdward Nathan Sonnenbergs IncSimilarly, the New Act provides that the board of a companymay resolve to issue shares of the company at any time, to the extentthat it has been authorised by or in terms of the company’s MOI.If the issuing of new shares requires the company to increase itsshare capital, such amendment of the share capital must be authorisedby the shareholders by way of special resolution, provided thatthe company is authorised by its articles to do so.Pre-emptive rightsShareholders are not granted pre-emptive rights in terms of the Act.The pre-emptive rights of shareholders are generally regulated inthe articles of a company or a shareholders’ agreement concludedbetween the company and its shareholders (where the company is aprivate company).The New Act provides that, save in certain limited instances, ifa private company proposes to issue any shares, each shareholder ofthe company shall have the right to be offered a percentage of theshares to be issued, equal to the voting power of that shareholder’sgeneral voting rights, except to the extent that the company’s MOIprovides otherwise.In the case of listed companies, the Listings Requirements providethat a company proposing to issue equity securities for cashmust first offer such securities to existing holders of equity securitiesin proportion to their existing holdings. Only to the extent that thesecurities are not taken up by the existing holders, may they be issuedfor cash to other persons or otherwise than in the aforementionedproportion.12 Restrictions on the transfer of fully paid sharesAre restrictions on the transfer of fully paid shares permitted, and if sowhat restrictions are commonly adopted?A private company’s articles must restrict the transferability of thecompany’s shares, limit the number of shareholders of the companyto 50 and prohibit the company from inviting the public to subscribefor shares or debentures in the company. It is common for shareholdersagreements of private companies to contain restrictions regardingthe transfer of shares.In the case of unlisted public companies, shareholders are generallyfree to transfer their shares, provided that the company’s articlesdo not contain any restrictions.In relation to listed public companies, such restrictions are disallowed.The Listings Requirements instead provide that securities forwhich a listing is sought must be fully paid up and be freely transferable,unless otherwise required by legislation.13 Compulsory repurchase rulesAre compulsory share repurchase rules allowed? Can they be mademandatory in certain circumstances?The Act permits the repurchase by a company of its own sharesprovided, inter alia, that such repurchase is authorised by the shareholdersby way of a special resolution, authorising the directors toimplement such repurchase generally, or in relation to a specifictransaction. A general authority granted to the directors is only validuntil the ensuing annual general meeting of the company.The New Act provides that a company may acquire its ownshares if such an acquisition is, inter alia, authorised by the board ofthe company after the board has applied the solvency and liquiditytest, as set out in the New Act.The Listings Requirements also permit a listed company torepurchase its own shares, subject to certain requirements.In addition, both the Act and the New Act provide that a subsidiarymay acquire a maximum of 10 per cent in aggregate of thenumber of issued shares of its holding company.Compulsory share repurchases are, however, not allowed, exceptby way of a court-sanctioned scheme of arrangement between thecompany and its shareholders in terms of the Act. A scheme ofarrangement shall be binding if it is approved by at least 75 per centof the shareholders present at a court-convened meeting at whichthe scheme is considered and if it is subsequently sanctioned by thecourt.14 Dissenters’ rightsDo shareholders have appraisal rights?Neither the Act nor the Listings Requirements afford appraisal rightsto dissenting shareholders. Companies may, however, provide forsuch rights in their articles. They may also be regulated in the shareholdersagreements of private companies.The only recourse available to dissenting shareholders in termsof the Act is to apply to a court for relief in the case of oppressive orunfairly prejudicial conduct of the company.The New Act provides shareholders with appraisal rights, interalia, in the instance where the company is considering the disposal ofall or the greater part of its assets or undertaking, or the amalgamationor merger of the company with another company.The responsibilities of the board (supervisory)15 Board structureIs the predominant board structure for listed companies bestcategorised as one-tier or two-tier?South African companies have a one-tier board structure, with executiveand non-executive directors interacting in a working group. Thetwo-tier board structure is not recognised under South African law.The King Code encourages the use of a one-tier board structure,and recommends that the board of a company should comprise abalance of executive and non-executive directors. It also recommendsthat non-executive directors be independent of management.16 Board’s legal responsibilitiesWhat are the board’s primary legal responsibilities?Directors’ contracts (if any) with the company determine their primaryresponsibilities.The articles of a company generally provide that the board of acompany is responsible for exercising all the powers of the companyand may contain more specific duties.Duties to avoid legal risk and damage to the company’s reputationare imposed on directors by the Act, the New Act and under thecommon law (by imposing fiduciary duties and the duty of skill, careand diligence on directors).The Act imposes various duties on directors in line with theirgeneral duty to manage the affairs of the company, which includethe duty to prepare (or cause to be prepared) the annual financialstatements of the company.The New Act provides that the business and affairs of the companymust be managed by or under the direction of its board, whichhas the authority to exercise all of the powers and perform any of thefunctions of the company, except to the extent that the New Act orthe company’s MOI provides otherwise. The New Act furthermorepartially codifies the common law duties of directors and sets out thestandards of conduct expected from directors. The codified statutoryduties of directors have not materially changed the common law andthe New Act does not add any new directors’ duties.17 Board obligeesWhom does the board represent and to whom does it owe legalduties?The board only represents, and owes its fiduciary duties to, the companyand not to its shareholders. However, directors are entitled, and218 Getting the Deal Through – Corporate Governance 2010


Edward Nathan Sonnenbergs Incsouth africaunder the New Act obliged, to take cognisance of the interests of allstakeholders of the company – subject to the directors always actingin the best interests of the company.If a company is insolvent, the directors also owe fiduciary dutiesto the creditors of the company, in certain circumstances.18 Enforcement action against directorsCan an enforcement action against directors be brought by, or onbehalf of, those to whom duties are owed?Directors can be held liable for a breach of their fiduciary duties ortheir duty to act with due skill, care and diligence, which is based onthe ‘reasonable director’ test. The company can proceed against thedirectors personally for acting in breach of their duties, or, in certaincircumstances, the shareholders of the company may enforce suchduties on behalf of the company by way of a derivative action.The Act provides that any shareholder may, on behalf of a company,initiate proceedings against a director or officer (past or present)of such company, where the company has sustained damages or lossas a result of any wrong, breach of trust or breach of faith committedby such director or officer – to the extent that the company has notitself instituted such proceedings. The New Act similarly providesfor a statutory derivative action against delinquent directors. Underthe New Act, the proceedings may be brought by any shareholder,director or prescribed officer, trade union or other person who hasbeen granted leave to do so by a competent court.The Act imposes personal liability on a director to the extent thathe is knowingly a party when the business of the company is carriedon recklessly or fraudulently. Such a director will also be guilty ofan offence.The New Act lists a number of instances in which a directormay be held liable for any loss, damages or costs sustained by thecompany, including where a director was party to an act or omissionby the company, despite knowing that such act or omission wascalculated to defraud a creditor, employee or shareholder of the company.The New Act further provides that a shareholder may applyto a court for an order necessary to rectify any harm done to theshareholder by any of the company’s directors, to the extent that thedirector may be liable under the New Act.19 Care and prudenceDo the board’s duties include a care or prudence element?The board has a common law duty to act with reasonable care, skilland diligence in the management of the company’s affairs. The careand diligence element is evaluated objectively against the standardof the reasonable person, while the skill element is evaluated subjectivelywith reference to the specific knowledge, skills and experienceof each director.The New Act provides that a director must exercise the powersand perform the functions of a director with the degree of care, skilland diligence that may reasonably be expected of a person carryingout the same functions in relation to the company as those carriedout by that director and having the general knowledge, skills andexperience of that director.20 Board member dutiesTo what extent do the duties of individual members of the board differ?All directors are subject to the same duties and liabilities. However,it is expected from each director to apply such care, skill anddiligence as can reasonably be expected from a person with his particularknowledge and experience – always to the advantage of thecompany.21 Delegation of board responsibilitiesTo what extent can the board delegate responsibilities to management,a board committee or board members, or other persons?It is standard practice for the articles of a company to make provisionfor the delegation of directors’ duties to one or more managing directors,managers, board committees or other third parties, subject tosuch limitations as may be stipulated in the articles of the company.Irrespective of any such delegation, directors still have to complywith their fiduciary duties and cannot wholly abdicate their responsibilities.The ultimate responsibility and liability, as well as thesupreme oversight function, vest with the directors at all times.The King Code suggests the establishment by the board of aframework for the delegation of authority, which include well-structuredcommittees. The King Code furthermore identifies specificduties of the board which should ideally be delegated to management,for example the responsibility to implement a risk management planfor the company.22 Non-executive and independent directorsIs there a minimum number of ‘non-executive’ or ‘independent’directors required by law, regulation or listing requirement? If so, whatis the definition of ‘non-executive’ and ‘independent directors’ and howdo their responsibilities differ from executive directors?There is no minimum number of non-executive and independentdirectors required by law, regulation or Listings Requirement.The King Code requires that the board comprise a balance ofexecutive and non-executive directors, with a majority of non-executivedirectors (who should preferably be independent). The KingCode provides that every board should have a minimum of twoexecutive directors, being the CEO and the director responsible forthe finance function.The King Code defines a ‘non-executive director’ as being a directornot involved in the day-to-day management of the business ofthe company, and who is not a full-time salaried employee of thecompany or any of its subsidiaries. In addition, the King Code definesan ‘independent director’ as being a non-executive director who, interalia, is free from any business or other relationship that could beseen to interfere materially with his capacity to act in an independentmanner, and who does not receive remuneration contingent upon theperformance of the company.The Listings Requirements require that the capacity of directorsof listed companies be categorised as either executive, non-executiveor independent, with reference to the definitions and guidelines containedin the King Code.Neither the Act nor the New Act distinguishes the duties of independentand non-executive directors, and, accordingly, they are subjectto the same duties and sanctions as executive directors. The SouthAfrican courts have, however, drawn a distinction between the dutiesof executive directors who participate in the day-to-day managementof the company and non-executive directors. Non-executive directorsare not bound to provide continuous attention to the company’saffairs – their duties are of an intermittent nature, to be performedat periodical meetings that may require their attention. They are alsonot bound to attend all meetings, but should do so whenever reasonablypossible.23 Board chairman and CEODo law, regulation, listing rules or practice require separation of thefunctions of board chairman and CEO? If flexibility on board leadershipis allowed, what is generally recognised as best practice and what isthe common practice?Although the separation or joining of the functions of the boardchairman and CEO is not required in law, it is common practice forcompanies to separate such functions.www.gettingthedealthrough.com 219


south africaEdward Nathan Sonnenbergs IncIn keeping with the recommendation contained in the King Code,the Listings Requirements provide that the position of CEO and chairmanin listed companies may not be held by the same person. Furthermore,the chairman must be an independent non-executive director,or the company must appoint a lead independent director in accordancewith the King Code. Non-compliance with the recommendationsmust be disclosed to shareholders in the company’s annual report.24 Board committeesWhat board committees are mandatory? What board committeesare allowed? Are there mandatory requirements for committeecomposition?The Act requires every widely held company (as defined in the Act)to appoint an audit committee for every financial year. An audit committeeis required to have at least two members and consist of onlynon-executive directors who must act independently.The New Act provides that public companies and state-ownedcompanies are obliged to elect an audit committee comprising at leastthree members (who are, inter alia, non-executive directors of thecompany) and furthermore sets out the requirements that such committeemust comply with. Under the New Act, the minister of tradeand industry may order a company to have a social and ethics committee,if it is in the public interest.The Listings Requirements prescribe that listed companies shouldcomply with the recommendations contained in the King Code,namely that, as a minimum, a listed company should have a remunerationcommittee and an independent audit committee, as well as(to the extent necessary) committees responsible for, inter alia, riskmanagement, information technology, environment, nomination andtransformation-related matters of the company.25 Board meetingsIs a minimum or set number of board meetings per year required bylaw, regulation or listing requirement?A minimum or set number of board meetings per year is not requiredby law, regulation or Listings Requirement. The King Code does,however, recommend that the board meets regularly, at least once aquarter, if not more frequently as circumstances require. The articlesof a company or a shareholders agreement concluded between a companyand its shareholders (where the company is a private company)generally regulate the minimum number of board meetings that mustbe held by a company.26 Board practicesIs disclosure of board practices required by law, regulation or listingrequirement?Neither the Act nor the New Act requires the disclosure of boardpractices. The King Code, however, recommends the disclosure ofboard practices to the stakeholders of the company. The ListingsRequirements contain extensive disclosure obligations with regardto the directors and management of listed companies.It is standard practice for the committee structure, number andattendance of meetings and other matters to be published in theannual reports of both listed and unlisted public companies.27 Remuneration of directorsIs there any law, regulation, listing requirement or practice thataffects the remuneration of directors, the length of directors’ servicecontracts, loans to directors or other transactions between thecompany and any director?Remuneration of directorsThe remuneration of directors of private and public companiesis ordinarily established in accordance with the articles of thecompany (which usually provide that directors’ remuneration shallbe determined by the company in general meeting) and any contractsbetween the company and its directors. The Act provides that theannual financial statements of a company must contain particularsshowing the emoluments received by directors, the pensions paid orreceivable by directors, any compensation paid to directors in respectof loss of office and details of directors’ service contracts.The New Act provides that a company may pay remunerationto its directors for their service, provided that such remunerationmay only be paid in accordance with a special resolution approvedby the shareholders within the preceding two-year period, except tothe extent that the company’s MOI provides otherwise. Similarly, theNew Act contains requirements regarding the disclosure of directors’remuneration in the annual financial statements of the company.The Listings Requirements provide that listed companies areobliged to comply with the King Code in regard to the remunerationof directors. The King Code requires the board (with the assistanceof the remuneration committee, consisting of a majority of nonexecutiveindependent directors) to annually present the company’sremuneration policy to its shareholders. The vote on the policy is anon-binding advisory vote that enables shareholders to express theirviews on such policy. Executive directors’ remuneration must subsequentlybe determined by the board, based on the shareholders’ voteon the proposed policy.Length of directors’ service contractsNeither the Act nor the New Act contains specific provisions regardingthe length of directors’ service contracts. Unless a director’s particularservice contract or the articles of the company provide otherwise,directors continue in office until their death, resignation, removal ordisqualification. The articles of a company generally provide for therotation of directors at the annual general meeting of the companyand that retiring directors may be re-elected.The King Code recommends that companies establish a programmeto ensure the staggered rotation of non-executive directors.In terms of the King Code, at least one-third of non-executive directorsshould retire by rotation at the company’s annual general meetingor other general meetings. Retiring directors may be re-elected.Loans to directorsBoth the Act and the New Act prohibit companies from making loansto directors, subject to certain exceptions, as set out in the Act andthe New Act.Other transactions between the company and directorsTransactions between a company and its directors are generally regulatedby the provisions of the Act and the New Act, as well as thearticles of a company.In the case of listed companies, the Listings Requirements containprovisions dealing with transactions between a company and a ‘relatedparty’ (as defined in the Listings Requirements). When any transactionis proposed between a listed company (or any of its subsidiaries) and arelated party, a circular to the company’s shareholders and the approvalof the shareholders of the company in general meeting (excluding therelated party and its associates) are generally required. In the case of a‘small related party transaction’, as defined, a company does not haveto comply with the aforementioned requirements but instead must,inter alia, publish a statement declaring that the transaction is fair, asfar as the shareholders of the company are concerned.28 Remuneration of senior managementHow is the remuneration of the most senior management determined?Is there any law, regulation, listing requirement or practice that affectsthe remuneration of senior managers, loans to senior managers orother transactions between the company and senior managers?The provisions set out above apply equally to senior managementof a company.220 Getting the Deal Through – Corporate Governance 2010


Edward Nathan Sonnenbergs Incsouth africaUpdate and trendsThe New Act was promulgated on 9 April 2009. The New Act willchange the landscape of corporate governance to the effect thatit partially codifies directors’ common law duties, extends theirliability and enhances shareholders’ rights.The publication of the King Code in 2009 was necessitatedby the New Act, as well as by recent changes in internationalcorporate governance trends. The King Code focuses on effectiveleadership, sustainability and the concept of corporate citizenship.New concepts introduced in the King Code include shareholderapproval of remuneration policies, performance evaluationof directors, governance in business rescue proceedings andalternative dispute resolution mechanisms.The financial crisisFortunately, South Africa has not experienced the impact of thecurrent financial crisis to the extent that many other economieshave. Although the global financial turmoil has caused an increasein shareholder activism and awareness in South Africa, we willmost likely not see the emergence of any additional corporategovernance regulation in the near future, bearing in mind the recentpromulgation of the New Act and the publication of the King Code.Shareholder interest and activismThe inclusive stakeholder approach that is aimed at the considerationof legitimate interests and expectations of stakeholders, other thanshareholders of companies, as well as the concept of sustainability,have recently enjoyed attention in South Africa and is included in theKing Code as underlying principles.Transformation of companies at board level (specifically in thecontext of black economic empowerment) remains an importantfocus point of shareholder interest and activism.During the past year, the interest in companies’ riskmanagement has increased, which is also dealt with in the KingCode.29 D&O liability insuranceIs directors’ and officers’ liability insurance permitted or commonpractice? Can the company pay the premiums?The Act provides that insurance may be taken out by a company toinsure itself against negligence, default, breach of duty or breach oftrust by directors or officers of the company.The New Act permits a company to purchase liability insuranceto protect:• a director against any liability or expenses, save in respect ofliability arising from certain limited circumstances, such as fromthe wilful misconduct or wilful breach of trust on the part of thedirector; and• the company against any expenses that the company is permittedto advance to a director and against any expenses or liabilityfor which the company is permitted to indemnify a director inaccordance with the New Act.In both instances, protection is offered except to the extent that theMOI of the company provides otherwise.However, the New Act also provides that a company may notindemnify any of its directors or any directors of related companies,in respect of any fine that may be imposed on such director as a resultof an offence in terms of any national legislation. For example, theCompetition Amendment Act No. 1 of 2009, in terms of which Acta fine may be imposed on a director of a company, if he or she causedthe company to engage in a prohibited practice (as defined) while heor she is a director of such company.It is common practice for a company to take out directors’ andofficers’ liability insurance and to pay the premiums.30 Indemnification of directors and officersAre there any constraints on the company indemnifying directors andofficers in respect of liabilities incurred in their professional capacity?If not, are such indemnities common?Yes, there are constraints under the Act. The Act provides that neitherthe articles of a company, nor any contract with a company, mayexempt any director or officer of the company from any liability inrespect of negligence, default, breach of duty or breach of trust ofwhich he may be guilty in relation to the company or may indemnifyhim against such liability, and any provision purporting to do soshall be void.The common law, however, provides that the shareholders ingeneral meeting may ratify or condone breaches of fiduciary dutiesor the duty of care, skill and diligence by directors, notwithstandingthe provisions of the Act.The New Act provides that, save in certain circumstances, anyprovision of a contract, the MOI or rules of a company, or resolutionadopted by the company, is void to the extent that it purportsto relieve a director or officer of a duty or liability, or to negate,limit or restrict any legal consequences arising from a director’s wilfulmisconduct or breach of trust. The common law position remainsunaffected.31 Exculpation of directors and officersTo what extent may companies preclude or limit the liability of directorsand officers?See question 30.32 EmployeesWhat role do employees play in corporate governance?South African company law does not provide for employee representationat board level, except to the extent that employees areappointed as executive directors on the board. Trade unions are,however, becoming increasingly responsive and are gradually exertingmore and more influence on companies. The King Code furthermorepromotes an inclusive stakeholder approach, resulting in thelegitimate interests and expectations of employees being consideredby the board.The New Act significantly enhances the rights of employees toparticipate in the governance of companies, including significant participationin the new business rescue regime, locus standi to use thederivative action against delinquent directors, managers and otherwrongdoers and whistle blower protection. The rights of trade unionsare also enhanced under the New Act.Disclosure and transparency33 Corporate charter and by-lawsAre the corporate charter and by-laws of companies publicly available?If so, where?Yes, the memorandum and the articles of a company are publiclyavailable at the offices of the Registrar.34 Company informationWhat information must companies publicly disclose? How often mustdisclosure be made?Companies have to disclose a range of information publicly, includingthe following:• private companies:• general corporate information, such as the company’sregistered address, auditors, directors, officers and localmanagers;• offers of shares to the public;www.gettingthedealthrough.com 221


south africaEdward Nathan Sonnenbergs Inc• public companies:• the annual financial statements;• disclosure in the annual financial statements of the personswho hold a beneficial interest of 5 per cent or more of theissued share capital;• listed companies:• dividends and interest;• the remuneration of executive and non-executive directors;• notifications relating to the capital and capital structure ofthe company;• disclosure in the annual financial statements of complianceor non-compliance with the King Code;• disclosure in the annual financial statements of the beneficialinterests of directors and major shareholders holding morethan 5 per cent of the issued share capital;• a general continuing obligation to disclose any circumstancesor events that have, or are likely to have, a material effecton the financial results, financial position or cash flow ofthe company, as well as any event that may lead to materialmovements in the company’s share price; and• the King Code requires companies to annually prepare anintegrated report that contains statutory financial informationand sustainability information, providing sufficientinformation on how the company positively and negativelyaffected the economic life of the community in which it operatedduring the year under review.Hot topics35 Say-on-payDo shareholders have an advisory or other vote regarding executiveremuneration?The King Code recommends that shareholders have an annual nonbindingadvisory vote on the remuneration policy of the company,whereafter the executive directors’ remuneration must be determinedby the board, based on the results of such vote.The New Act provides that, except to the extent that the MOI ofa company provides otherwise, the company may pay remunerationto its directors for their service as directors, provided that it is paidin accordance with a special resolution approved by the shareholderswithin the previous two years.36 Proxy solicitationDo shareholders have the ability to nominate directors withoutincurring the expense of proxy solicitation?The process relating to the appointment of directors is typically regulatedby the articles of a company, including in relation to any proxyrequirements.Edward Nathan Sonnenbergs IncMohamed Sajid Darsotmdarsot@ens.co.za1 North Wharf Square Tel: +27 21 410 2500Loop Street Fax: +27 21 410 2555Foreshorewww.ens.co.zaCape Town 8001South Africa222 Getting the Deal Through – Corporate Governance 2010


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