Walkers Attorneys

Directors’ Code Of Conduct
Minority Shareholders’ Rights

• Current Act modelled on UK legislation
• UK legislation served as model for the Commonwealth
• New Act reflects contemporary concerns, while still fundamentally adhering to UK model, supplemented by ‘borrowings’ from elsewhere
• Contemporary concerns include:
• BEE: issue of shares in consideration for future services
• Corporate governance: directors’ code of conduct
• Protection of minority shareholders: appraisal rights

CORPORATE GOVERNANCE: THE CODE OF CONDUCT

• Code of Conduct set out in section 76
• Given ‘teeth’ by section 77 – financial liabilities in the event of misconduct
• Code of Conduct consists of negative injunctions (‘you must not’) and positive injunctions (‘you must’)

NEGATIVE INJUNCTIONS

• Abuse your position as director to gain any advantage for anyone other than the company or its wholly-owned subsidiaries
• Knowingly cause harm to the company or its subsidiaries

POSITIVE INJUNCTIONS

• Disclose all material information to the board, unless restrained by legal or ethical obligations of confidentiality
• Exercise your functions in good faith, and in the best interests of the company
• Perform your functions with the degree of care, skill and diligence that may reasonably be expected of a director performing similar functions and having the same general knowledge, skills and experience
• May amount to ‘the fool’s last refuge’, and a condonation of ineptitude.

THE GENERAL TEST OF COMPLIANCE

GIVING IT TEETH – SECTION 77 AND FINANCIAL LIABILITIES

• Affirmation of common law liability for loss, damage or costs incurred by a company
• Express extension of liability to specific acts or omissions – eg: reckless trading; want of authority; fraud upon creditors, employees or shareholders
• Exculpated if you nonetheless acted reasonably or honestly, and it would be fair to excuse you

PROTECTION OF MINORITY SHAREHOLDERS

• Protection extended by ‘appraisal right’ – right, in defined circumstances, to insist that your shares be bought back at fair value
• Appraisal rights (afforded by section 164) extended to dissenting minority shareholders who are not prepared to go along with:

• scheme of arrangement (reorganisation of share capital by way of creation of new class of shares, share splits or consolidations, share buy-back)
• sale of greater part of assets
• merger or amalgamation

PROCEDURE

• Must give notice of opposition to proposed resolution
• Must vote against adoption of resolution
• Onus on directors to formulate offer to repurchase at fair value
• May approach court if offer not forthcoming or not fair
• Court may be guided by valuers

IMPLICATIONS

• Cannot contract out of section 164 in shareholders’ agreement
• Will override common stipulations in shareholders’ agreements such as a ‘lock-in’ and subjection to artificially determined exit price
• Save in the case of amendments to MOI there is no requirement that shareholders must establish detriment

by

WOUTER SCHOLTZ

of Mazars Moores Rowland

for

WALKERS ATTORNEYS

and their clients