The Companies Act No. 71 of 2008 (“Companies Act”) defines a director as either a member of the board of a company, as contemplated in section 66 of the Act, or an alternate director of a company and includes any person occupying the position of a director or alternate director, by whatever name designated.
Section 66 of the Companies Act adds to this definition by stating that 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 the powers and perform any of the functions of the company, except to the extent that the Companies Act or the company’s memorandum of incorporation provides otherwise.
The Companies Act does not differentiate between different types of directors, nor does it refer to the concept of “shadow directors”, which is a recognised term in the law of the United Kingdom (“UK”) and various other jurisdictions. The Companies Act does however contain the concept of prescribed officers.
This article unpacks each of the above-mentioned concepts and considers how they differ from one another.
The corporate governance institute states that shadow directors are persons who are recognised as such because of the influence or control which they exercise over a company.
Section 251 of the Companies Act of 2006 of the UK (“UK Companies Act”) defines a shadow director as “a person in accordance with whose directions or instructions the directors of the company are accustomed to act”. The UK Companies Act qualifies this definition by stating that –
- a person is not to be regarded as a shadow director for the sole reason that the directors act on advice given by such person in a professional capacity; and
- a body corporate is not to be regarded as a shadow director of any of its subsidiaries for the purposes of certain sections of the UK Companies Act which relate to –
- general duties of directors;
- transactions requiring members’ approval; and
- contracts with sole members who are also directors,
for the sole reason that the directors of the subsidiary are accustomed to act in accordance with the subsidiary’s directions or instructions.
Various UK case law has provided further clarity on when a person is considered a shadow director. In essence, an objective test is applied to determine whether the directions or instructions in question were relied on and acted upon by the board of the company and carried real influence in relation to the business activities of the company. Irrespective of whether or not there was any expectation that such directions or instructions would be followed.
Any natural or incorporated person can be considered a shadow director of a company including a holding company or other controlling shareholder, a bank or a major creditor of a company.
Liability attributable to shadow directors:
The implications of being considered a shadow director are found in UK common law which suggests that the general rule is that shadow directors are not fiduciaries and owe no fiduciary duties to the company whose directors they influence.
There are two exceptions to this general rule, namely –
- where shadow directors’ actions extend to a voluntary assumption of direct control of a company’s asset; and
- where it can be said that the shadow director acted as the fiduciary considering the extent of the control which a shadow director exercised over one or more fiduciary/ies and the lack of autonomy with which such fiduciary/ies acted.
The UK law therefore only attributes liability to shadow directors in limited instances.
The Companies Act, read with its regulations, defines a prescribed officer as –
- a person who exercises general executive control over and management of the whole, or a significant portion, of the business and activities of the company; or
- regularly participates to a material degree in the exercise of general executive control over and management of the whole, or a significant portion, of the business and activities of the company.
The definition applies to persons with any title given by the company in relation to the office held by such person or a function performed by such person in the company.
The definition of a prescribed officer therefore appears to contemplate senior employees of companies such as members of senior management and executives of a company.
Liability attributable to prescribed officers:
A prescribed officer is subject to –
- section 75 (Director’s Personal Financial Interests) of the Companies Act which sets out how directors and prescribed officers must deal with personal financial interests and the disclosure thereof;
- section 76 (Standards of Directors Conduct) of the Companies Act which sets out the standards with which the directors must conduct themselves, including but not limited to, exercising the powers and perform the functions of a director –
- in good faith and for a proper purpose;
- in the best interests of the company; and
- with the degree of care, skill and diligence that may be reasonably expected of a person carrying out the same functions as those carried out by that director, and having the general knowledge, skill and expertise of that director; and
- section 77 (Liability of Directors and Prescribed Officers) of the Companies Act which sets out the instances in which directors and prescribed officers can be held personally liable including, but not limited to –
- a breach of a duty set out in sections 75 or 76 of the Companies Act;
- acting without the necessary authority;
- allowing the business to carry on recklessly, with gross negligence or the intention to defraud any person or for a fraudulent purpose;
- being a party to any act or omission by the company with the knowledge that such act or omission was calculated to defraud a creditor, employee or shareholder of the company or had another fraudulent purpose;
- knowingly signing, consenting to, or authorising the publication of false, misleading, or untrue financial statements or prospectuses; and
- being present at a directors’ meeting and failing to vote against certain decisions which are contrary to certain sections of the Companies Act.
The Companies Act therefore attributes liability to prescribed officers for several forms of conduct which are contrary to the Companies Act and would ordinarily be attributable to directors.
In light of the above, it appears that the concepts of shadow directors and prescribed officers, have the following pertinent differences –
- the term shadow director, as defined by the UK Companies Act, focuses predominantly on natural or juristic external persons who influence the decisions of the directors of a company whereas, the term prescribed officer, as defined by the Act, appears to focus on internal natural persons;
- prescribed officers control and manage the whole or a significant portion of the business and activities of the company. This is not a requirement for a person to be considered a shadow director; and
- the UK law only attributes liability to shadow directors in limited instances, whereas the Companies Act attributes liability to prescribed officers for several forms of conduct.
Whether or not the concept of shadow directors will be introduced into South African law to attribute liability to natural or juristic external persons who influence the decisions of directors remains to be seen.
In the meantime, directors and persons who qualify as prescribed officers in terms of the Companies Act should ensure that they act with the degree of care, skill and diligence that may be reasonably expected of them to reduce the risk of attracting liability.
VDMA’s team of experts is at your disposal for any company law assistance that you or your business may require.
Published 18 November 2022