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Boards can’t simply quit en masse

COMMENT

Recent scandals in the private and public sectors have focused attention on the duties of directors to the companies they serve, the shareholders and employees, and the public.

In the face of increased scrutiny for noncompliance with fiduciary duties and the threat of legal liability, many directors vacate their positions before the end of their terms of office. This includes directors of some state-owned entities (SOEs).

At the beginning of February, nine out of 11 Public Investment Corporation (PIC) board members wrote to Finance Minister Tito Mboweni requesting that he release them from their roles as directors.

The letter cited a “concerted effort to discredit the board” as one reason for their request.

This followed allegations that certain PIC board members had improperly influenced investment decisions or failed to provide proper oversight over investment decisions such as the controversial R4.3-billion investment into Ayo Technology Solutions. These allegations are being ventilated before the PIC judicial commission of inquiry.

READ MORE: Ayo financials tampered with on Survé’s instruction, says ex-chief exec

It is not impossible to imagine future instances in which the directors of SOEs will seek to unilaterally resign en masse to protect themselves from potential liability for damages and losses incurred as a result of directors’ decisions.

Regulators such as the Companies and Intellectual Property Commission or other interested parties may also apply to a court to have a director declared delinquent, thereby disqualifying them from being appointed to any other board.

Our courts have not often ruled on mass resignations by directors.

In 2006, the high court in Johannesburg did so in the case of Minister of Water Affairs & Forestry vs Stilfontein Gold Mining Company Ltd & others.

In this case, all directors at Stilfontein resigned after the company had repeatedly failed to comply with the directives issued by the department.

The directors said they had been advised to resign because they risked being regarded as party to reckless trading if they continued to sit on the board.

The judge found that it was reckless for the board of a listed public company to resign en masse, thereby leaving the company without any directors. The judge said that directors were the human agents through which a company acts. Except in certain limited circumstances, a company is usually unable to act without a board.

Stilfontein’s board should have called a meeting of shareholders to elect a new board and limit the negative effect on the share price.

The judge found that the directors had not acted in good faith towards the company and had failed to comply with the corporate governance standards set out in the King II Code of Corporate Governance, which applied at the time.

The Stilfontein case concerned a public company, but the general principles laid out by the court find equal application to SOEs. When contemplating a mass resignation, the board members of an SOE must consider the following:

• The circumstances that led them to consider resigning. The board must consider whether a court would find their resignation irresponsible, given the circumstances. For example, a court is unlikely to view a unilateral mass resignation positively if the board’s participation in malfeasance has destabilised a SOE and the resignations are an attempt to escape accountability; and

• The board must act in good faith and in the bests interests of the SOE. Directors must consider (a) the legitimate interests of the Cabinet, employees and other oversight bodies, and (b) the legal requirements and operational needs of the SOE, including its service delivery mandate.

The board must also consider whether the SOE can function without a board and how complex the process of replacing the board is.

In their letter to Mboweni, the PIC board members said they were willing to stay on until the minister appointed a new board.

They were mindful of the potential legal consequences of a mass resignation in light of the fact that the PIC is an asset manager and a SOE.

Of course, these considerations apply to a lesser extent in a scenario where the minister wishes to remove the board and requests the directors to resign.

In that situation, one can presume that the minister would have taken advice on the relevant legal process for the appointment of a new board and would already have replacement directors in mind.

The decision to resign should not always be perceived from a director’s unilateral lens. Directors should be mindful of their importance in the company.

A decision to resign as part of a group should balance that director’s personal and collective circumstances against the interests of all other role players in the SOE.

Sihle Bulose is an attorney at the Sandton-based law firm, RM & Partners. These are his own views

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Sihle Bulose
Sihle Bulose
Sihle Bulose is an attorney at the Sandton-based law firm, RM & Partners. These are his own views.

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