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CGF ARTICLES, OPINIONS & EDITORIALS

Holding companies accountable: The Turquand Rule (2013-11-21)

Article by CGF Research and reviewed by Cliffe Dekker Hofmeyr Inc.

South Africa’s democracy has now almost completed its second decade of transformation, and the country has seen much needed change across many of its social, civil and business sectors.
But, political commentators and business critics may argue that some of the changes in South Africa have indeed caused certain matters to regress in practical terms.  The typical examples of this criticism may be found in the county’s high levels of crime and corruption, stubbornly high unemployment rates, poor municipal service delivery, growing social unrest, civil turmoil, political uncertainty and an ailing education system.  And while business leaders cite their growing concern around these issues, it is becoming abundantly clear that many companies may not have fathomed yet another looming challenge in the new Companies Act, 71 of 2008 which they will need to address if they are to survive the might of a more informed and empowered consumer, or a third party wishing to take their company to task and adding yet further to their woes.

With the introduction of the Companies Act, 71 of 2008 (‘the Act’), a number of significant changes were brought about which were beneficial for the formation, administration and general functioning of a company.  These changes were necessary to also improve the company’s corporate governance and its efficiency, by aligning the Act with international best practices and safeguarding the interests of the company and its stakeholders.  While the Act now includes a number of protection mechanisms for shareholders, employees and other stakeholders, the company is -- through the Act -- now legally compelled to regulate its internal affairs and procedures through the introduction of the Memorandum of Incorporation (‘MOI’), which is the new term ascribed to the company's constitution.

Rather surprisingly, many companies have overlooked the importance and function of their MOI, a document which now fulfills the role that the company’s Memorandum and Articles of Association had under the previous Companies Act, 61 of 1973 (‘old Act’).  To make matters worse, the MOI has -- in some instances -- simply been “brushed over” by the company’s internal legal departments or company secretariat, and they have missed its significant importance as a practical tool to guide the actions and behaviour of mostly their directors, board committees and prescribed officers.  Expectedly, there are a number of compulsory matters which must be contained in a company's MOI, but in addition to these, many companies have failed to include the manner in which they will deal with the Act’s so-called alterable provisions (i.e. provisions which can be adapted and modified by the company in its MOI) which cover issues such as corporate governance (in particular the procedures of the board and the shareholders), delegated power of authority, separation of duty and limitations on the board's powers which it has under the Companies Act, to mention a few.

As boards of directors begin to reflect upon the implications of the Act, including their MOI which may currently lack the required detail for its company officers to clearly understand their boundaries of authority, respective mandates and expected behaviour; they may well have reason to be concerned.  In the previous era of the old Act, some directors may typically have sought board approval for their actions -- which were in fact contrary to the rules and policies of the company -- to have their wrong-doing “quietly condoned”.  Most often this approval was granted by the board after the deed had already taken place, and perhaps sometimes as a “cover-up” to protect both the director and the company.  This practice was rife, and whilst the Act has now toughened up its stance on unauthorised actions of directors, it is most likely still being done as directors remain “ignorant” of their violations in order to benefit the company or themselves in one way or another.  It is worth noting that the new Companies Act 2008 has singled out the issue of acting without authority as a particular concern.  In section 77, specific statutory personal liability is created in respect of directors and other officers for knowingly acting without authority (and "knowingly" in the Act means not only actual subjective knowledge but also captures those situations where the director ought reasonably to have known of his lack of authority).  In section 78, which deals with the competence of companies to indemnify or insure their directors and officers, one of the specific exceptions to this competence is where the liability is incurred pursuant to the director / officer knowingly acting without authority.
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