The Regulation of Shadow Directors

• Jurisdiction: South Africa
• Published date: 25 May 2019
• Citation: (2010) 22 SA Merc LJ 326
• Author: Kathy Idensohn
• Pages: 326-345
• Date: 25 May 2019

The Regulation of Shadow Directors

KATHY IDENSOHN*

University of Cape Town

1 Introduction

There has been increasing concern about the need for effective measures to

hold those who exercise a signif‌icant degree of actual inf‌luence or control

over the management of companies accountable for their conduct. The

formulation of appropriate mechanisms for doing so is particularly

problematic where the inf‌luence or control is of an indirect nature.

The concept of a ‘shadow director’ was introduced into English law almost

a century ago

1

for regulating people who exercise indirect inf‌luence or control

by giving instructions or directions to a company’s board of directors which

the directors are accustomed to obey. Since then several other Commonwealth

jurisdictions have also enacted similar specif‌ic provisions on shadow

directors. South Africa has not followed suit.

2

The Companies Act 2008

3

(‘the

2008 Act’) does, however, introduce the concept of a ‘prescribed officer’. It

appears from the draft def‌inition of the term

4

and the provisions applicable to

it that it may have been intended, at least in part, to address those who act in

ways analogous to shadow directors.

I will consider whether there is any need in South African law for

introducing express statutory provisions to regulate shadow directors and, if

so, the extent to which the new provisions on prescribed officers constitute an

appropriate response to that need. English law will be used as a point for

reference for a comparative examination of the following more specif‌ic

issues:

• the ways in which other jurisdictions have def‌ined the concept of a

‘shadow director’ and interpreted and applied that def‌inition;

• the civil duties, liabilities and other consequences that attach to shadow

directors, their theoretical basis and their location within the broader legal

framework; and

• the extent to which existing rules and principles of South African law

*BA LLB (cum laude) (UCT) LLM (Cantab). Attorney of the High Court of South Africa. Senior

Lecturer, Department of Commercial Law, University of CapeTown. With thanks to Prof Alan Rycroft

for his comments on an earlier draft of this article.

1

By s 3 of the Companies (Particulars as to Directors) Act 1917 (7&8 Geo 5 c 28).

2

There has also been very little South African commentary on the concept apart from JS McLennan

‘Directors’ Duties and Misapplications of Company Funds’ (1982) 99 SALJ 394; N Locke ‘Shadow

Directors: Lessons from Abroad’(2002) 14 SA Merc LJ 420.

3

The Companies Act 71 of 2008.

4

Section 1 of the 2008 Act def‌ines a ‘prescribed officer’ as ‘the holder of an office,within a company,

that has been designated by the Minister in terms of s 66’. Adraft def‌inition is contained in reg 45 of the

Draft Companies Regulations Pursuant to the Companies Act, 2008 Notice 1664 Government Gazette

No 328832 of 22 December 2009. For the full draft def‌inition, see note 108 below.

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(2010) 22 SA Merc LJ 326

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already provide satisfactory equivalent accountability despite the absence

of any express or specif‌ic recognition of shadow directors.

I will then argue that in certain respects South African law already provides

regulation and accountability equivalent to that provided by English law.

There are currently only two types of English statutory provisions that are not

present in South African legislation: provisions that require the disclosure of

certain information relating to shadow directors in annual f‌inancial statements

and those that regulate company transactions in which shadow directors have

an interest. If the f‌inal def‌inition of a ‘prescribed officer’ includes a shadow

director, then those statutory ‘gaps’ will be f‌illed once the 2008Act is in force,

and South African statutory regulation of shadow directors will be

substantially the same as that in English law. The inclusion of shadow

directors within the def‌inition of a ‘prescribed officer’ would, however, also

go further than the English statutory regulation by imposing certain statutory

f‌iduciary and other duties on shadow directors. Finally, I will conclude that

the issue of whether shadow directors are or should be subject to any f‌iduciary

duties other than those that may be applicable under the 2008 Act is best left

to the courts to determine.

2 The Concept of a Shadow Director

2.1 The Definition of a ‘Shadow Director’

The f‌irst formal reference to a ‘shadow director’ in English law was in the

Companies (Particulars as to Directors) Act 1917, which extended the term

‘director’ to include ‘any person in accordance with whose directions or

instructions the directors of a company are accustomed to act’.

5

A similar

def‌inition was included in subsequent Companies Acts

6

and in various other

statutes relating to companies.

Section 251(1) of the Companies Act 2006 def‌ines a ‘shadow director’ as ‘a

person in accordance with whose directions or instructions the directors of the

company are accustomed to act’. There are two express exclusions from

the general def‌inition. First, ‘[a] person is not to be regarded as a shadow

director by reason only that the directors act on advice given by him a

professional capacity’.

7

Secondly, a corporate entity is not to be regarded as

a shadow director of any of its subsidiary companies for the purposes of

certain of the Act’s shadow director provisions

8

‘by reason only that the

5

Section 3 of the Companies (Particulars as to Directors) Act 1917.

6

For example, s 741(2) of the Companies Act 1985 (c 6) which, unlike the 1917 Act, def‌ined a

‘shadow director’ separately and not as part of the general def‌inition of a ‘director’.

7

Section 251(2) of the Companies Act 2006 (c 46).

8

Section 251(3) of the Companies Act 2006. The shadow director provisions referred to in the

exclusion are those contained in Chapter 2 (the general duties of directors); Chapter 4 (transactions

requiring members’ approval); and Chapter 6 (contracts with a sole member who is also a director).

REGULATION OF SHADOW DIRECTORS 327

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