A critical examination of 'nominee directors' in South Africa

• Jurisdiction: South Africa
• Date: 16 August 2019
• Published date: 16 August 2019
• Citation: (2016) 2(2) JCCL&P 42
• Pages: 42-76
• Author: Lovanya Moodley

42

A CRITICAL EXAMINATION

OF ‘NOMINEE DIRECTORS’ IN

SOUTH AFRICA

Lovanya Moodley*

Attorney of the High Court of South Africa

ABSTRACT

This article considers nominee directors: their fiduciary duties,

liability for breach thereof and whether they should be entitled to

directors’ fees for their services rendered as a director. The position of

nominee directors in relation to their fiduciary duties is a precarious

one. They are appointed with the purpose of performing an oversight

function on behalf of their appointer, but could face personal liability

for breach of fiduciary duties if they act in the furtherance of their

appointer’s interests to the detriment of the nominee company. In the

event of a nominee director wanting to receive remuneration by way

of directors’ fees for services rendered as a director, there needs to be

an express agreement of that entitlement in place or a shareholders’

resolution. Finally, and as a consequence of nominee directors lack

of complete unfettered independence, this article finds that the

Companies Act 71 of 2008 does not sufficiently accommodate the split

loyalties of nominee directors and suggests that companies should

avoid utilising them altogether in favour of the alternatives provided

in King III, such as Lead Independent Directors or independent non-

executive directors, in view of exercising good corporate governance.

Key terms: Conflict situations; fiduciary duties; directors’ fees

I INTRODUCTION

Holding a company directorship places a complex range of fiduciary

duties on a director.1 When a director is appointed, not only does a

fiduciary relationship between the director and the company arise,

but also the director is entrusted with powers, in view of him or her

exercising those powers for the benefit of the company.2 A nominee

* LLB (UKZN), LLM Labour Law (UKZN), LLM Business Law (UKZN), National

Certificate in Banking and Risk Management (UNISA).

1 M Havenga ‘Directors’ fiduciary duties under our future company-law regime’

1997 SA Merc LJ 310, 311.

2 Havenga op cit note 1 at 311.

(2016) 2(2) JCCL&P 42

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A CRITICAL EXAMINATION OF ‘NOMINEE DIRECTORS’ IN SOUTH AFRICA

director is appointed to the board of directors of a company by a

certain appointor.3

The Companies Act 71 of 2008 (the Act) permits the appointment

of a director to the board without the need for an election by the

shareholders in three circumstances: (i) at the instance of a person

(any person) named in the Memorandum of Incorporation (MOI) if

the MOI so allows; (ii) ex officio on account of a person holding an

office which the MOI states is one that carries with it appointment

to the board of directors; and (iii) if the MOI allows the board of

directors to fill a casual vacancy in any of the above.4

Prior to the introduction of the Act, directors’ duties were largely

regulated by the common law and codes of good practice such as the

King Report on Corporate Governance.5 The Act partially codified

directors’ fiduciary duties under s 76. Henochsberg6 explains that

the 1973 Companies Act7 did not codify directors’ duties but rather

provided for statutory duties in addition to the common law fiduciary

duties and the duty of care and skill.8

Section 76(3) of the 2008 Act specifically places an obligation on

directors, when acting in that capacity, to exercise their powers and

perform the functions of a director in good faith and further requires

the director to promote the best interests of the company in which

he performs these duties. While this section prescribes the directors’

standards of conduct, it does not exclude the common law duties placed

on directors.9 It actually reiterates the common law position.10

These extensive duties include mandatory adherence to the

company’s MOI11 and rules,12 the onus to disclose personal interests

in company matters,13 the duty to perform functions as a director

in good faith and for a proper purpose in the best interests of the

3 K Anandarajah & FE Lin ‘Developments in the law relating to nominee directors’,

available at http://www.lawgazette.com.sg/2004-3/March04-feature4.htm, accessed

on 5 December 2016.

4 I Cox ‘The appointment of directors under the 2008 Companies Act’ 25 October

2012, available at http://www.mondaq.com/southafrica/x/203172/Directors+Officers/

The+Appointment+Of+Directors+Under+The+2008+Companies+Act, accessed on

30 July 2015.

5 M King SC King Report on Governance for South Africa (2009) (King III).

King III is the latest report.

6 Henochsberg on the Companies Act 71 of 2008 (2015) Vol 1: 290(3) (Henochsberg).

7 Act 61 of 1973.

8 Henochsberg Vol 1, 290(3).

9 P Delport The New Companies Act Manual (2009) 59.

10 Sanlam Capital Markets (Pty) Ltd v Mettle Manco (Pty) Ltd and others [2014] 3 All SA

453 (GJ) para 42.

11 A company’s MOI is defined under s 1 of the Act as a document that sets out the

rights, duties and responsibilities of shareholders, directors and others within and

in relation to the company.

12 Section 15 (6)(c)(i).

13 Section 75.

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(2016) 2 (2) JOURNAL OF CORPORATE AND COMMERCIAL LAW & PRACTICE

company,14 and the duty to exercise reasonable care, skill and

diligence in carrying out his or her functions.15

The term ‘director’ is widely defined in the Act.16 It includes all

persons who occupy the role of a director irrespective of their title.

Further, under s 76, a director includes a prescribed officer, members

of board committees (even if they are not members of the board) and

audit committee members, all of whom need to be board members.

Although the concepts of a de jure, de facto, ‘nominee’, ‘shadow’

directors are commonly recognised commercially, they are not

specifically defined under the Act. They all fall under the wide

definition of ‘director’ as defined in s 1, irrespective of the title given

to that person, provided that he occupies the position of a director.

The focus is on the function or role the person plays in the company.

At common law, the Appellate Division17 recognised that

classifying a director as ‘executive’ or ‘non-executive’ or ‘de facto’

serves no purpose when attempting to ascertain the extent of their

duties. Primarily, if a person accepts the appointment as a director by

a company, then he must serve the best interests of that company.18

This approach highlights the difficulties faced by nominee

directors. The court in Fisheries Development Corporation19 emphasised

that a director’s duty is to act in the utmost good faith towards a

company even if he is representing the interests of a nominator and

is a servant or agent of that nominator.20 The court held that, by law,

the nominee director needs to serve the interests of the company to

the exclusion of the nominator, employer or principal.21

After setting out the different types of directors and how directors

are appointed, this article briefly discusses the fiduciary duties owed

by directors to their company. The article then examines the potential

conflict situation that arises with the ‘nominee director’ who wears

two ‘hats’ – his fiduciary duty obliges him to promote the interests

of the company onto which board he is nominated (‘the nominee

company’), while his loyalty to the person who appointed him may

require him to safeguard their interests.

The article offers suggestions for good governance to companies

who permit or need nominee directors to be appointed onto their

boards. Anyone who takes up the position of a nominee director

14 Section 76 (3)(a) and (b).

15 Section 76 (3)(c).

16 Section 1 and s 66.

17 Howard v Herrigel NNO 1991 (2) SA 660 (A).

18 Howard op cit note 17 para 58.

19 Fisheries Development Corporation of SA Limited v Jorgensen 1980 (4) SA 156 (W).

20 Fisheries Development Corporation op cit note 19, 163 para E-F.

21 Ibid.

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