Management of the Affairs of a Company
Subsection 66(1) of the Companies Act 71 of 2008 (“the Act”) provides “The business and affairs of a company must be managed by or under the direction of its board, which has the authority to exercise all of the powers and perform any of the functions of the company, except to the extent that this Act or the company’s Memorandum of Incorporation provides otherwise.”
According to Henochsberg on the Companies Act, subsection 66(1) places a positive obligation on the directors to manage the Company or it can be argued this section allows for the division and allocation of responsibilities between directors and shareholders. [1]
Shareholder Participation
The objective of good governance practices includes creating value for shareholders. In smaller closely held private companies it is common for certain decisions to revert back to the shareholders and not be addressed by the board of directors to allow for shareholder protection. Often this category of decisions is referred to as reserved matters and require unanimous resolution or special resolution to be passed.
Shareholder Resolutions and the Act
Section 65 of the Act addresses the matter of shareholders resolutions.
Resolutions can be taken:
- at properly constituted meeting which includes by electronic participation;
- by shareholders acting other than at a meeting provided that the provisions of section 60 of the Act are complied with; or
- in terms of Levy v Zalrut Investments (Pty) Ltd 1986 (4) SA 479 (W) at 485F it was stated that “… the unanimous consent of the shareholders of a company to a specific transaction has the same effect and validity as the approval of such transaction by a general meeting of the company.”[2]
Section 63 of the Act allows for shareholders meetings to take place electronically or by electronic communication provided that the Company’s Memorandum of Incorporation does not prohibit this and the requirement of that section have been met.
A resolution put forward by the board or the shareholders must in terms of subsection 65(4) of the Act be “(a) expressed with sufficient clarity and specificity; and (b) accompanied by sufficient information or explanatory material, to enable a shareholder who is entitled to vote on the resolution to determine whether to participate in the meeting and to seek to influence the outcome of the vote on the resolution.”
Once a resolution is approved, it may not be challenged on the grounds that it did not satisfy the aforesaid provisions of section 65(4).
Every shareholders resolution in terms of the Act is an ordinary or a special resolution.
The approval by shareholders required for:
- an ordinary resolution is 50% of the voting rights exercised;
- a special resolution is 75% of the voting rights exercised
In terms of the Act, differing percentages may be allowed for the approval of a special resolution provided that this is permitted in the Memorandum of Incorporation of a Company and there is a difference of 10 percentage points for the highest established approval of an ordinary resolution and the lowest established approval of a special resolution.
At section 65(11) of the Act, provision is made for a number of decisions which must be put to the shareholders of the company and passed by special resolution, namely:
“(11) A special resolution is required to—
(a) amend the company’s Memorandum of Incorporation to the extent required by section 16 (1) (c) and section 36 (2) (a);
(b) ratify a consolidated revision of a company’s Memorandum of Incorporation, as contemplated in section 18 (1) (b);
(c) ratify actions by the company or directors in excess of their authority, as contemplated in section 20 (2);
(d) approve an issue of shares or grant of rights in the circumstances contemplated in section 41 (1);
(e) approve an issue of shares or securities as contemplated in section 41 (3);
(f) authorise the board to grant financial assistance in the circumstances contemplated in section 44 (3) (a) (ii) or 45 (3) (a) (ii);
(g) approve a decision of the board for re-acquisition of shares in the circumstances contemplated in section 48 (8);
(h) authorise the basis for compensation to directors of a profit company, as required by section 66 (9);
(i) approve the voluntary winding up of the company, as contemplated in section 80 (1);
(j) approve the winding up of a company in the circumstances contemplated in section 81 (1);
(k) approve an application to transfer the registration of the company to a foreign jurisdiction as contemplated in section 82 (5);
(l) approve any proposed fundamental transaction, to the extent required by Part A of Chapter 5; or
(m) revoke a resolution contemplated in section 164 (9) (c).”
Reserved Matters
In terms of the Act a company’s Memorandum of Incorporation may require a special resolution to approve matters not specifically addressed in subsection 65(11).
When considering shareholder protection one would require careful consideration of a number of issues which include the expertise, structure and composition of the board, the nature and size of the business, the number of shareholders and apportionment of shareholding within the company and whether one is a minority or majority shareholder in negotiating shareholder protection.
It would be important to strike a balance to avoid hamstringing the board in the management of the company whilst protecting shareholders in the decision making of the Company.
Reserved matters and issues protecting shareholder’s rights may include but not be limited to:
- the decision to hire employees or certain contracts whether generally or within certain categories or at specific monetary values;
- the decision to incur expenditure of a specific amount and or category
- approval of annual financial statements;
- the choice of the appointment of auditors of the company;
- the decision to conclude specific types of contracts giving rise to legal obligations on the part of the company;
- transferring of funds to and from reserves.
Shareholder protection is an interesting topic and may require advice in considering and formulating suitable provisions.
Should you require assistance in these and other Company Law matters, Boogaard Attorneys can service Clients in various areas in Johannesburg including Bryanston, Dainfern, Fourways, Midrand and Sandton to name a few and we also can facilitate online meetings for all Client’s including those elsewhere in South Africa.
By L Boogaard
Boogaard Attorneys
16/02/2022
Bibliography
Delport, Henochsberg on the Companies Act 71 of 2008 (1st Edition, Publisher Lexis Nexis)
Legislation
The Companies Act 71 of 2008
Case Law
Levy v Zalrut Investments (Pty) Ltd 1986 (4) SA 479 (W) at 485F
[1] Delport, Henochsberg on the Companies Act 71 of 2008 (1st Edition, Publisher Lexis Nexis)
[2] Ibid