Directors can expect heightened shareholder activism under new Companies Act
- May
- 25
- 2010
- Posted by MDACC
- Posted in Taxation Blog
Directors and officers, charged with making difficult management decisions in the course of their work, may face heightened litigation once the new Companies Act comes into effect in later this year. Increased litigation may also cost directors millions in their personal capacity.
Key provisions in the new Act will raise directors accountability to shareholders and increase the likelihood of shareholders participating in legal action, particularly if the company and its officers caused shareholders to suffer significant financial loss.
“The scope of persons able to bring an action as well as the basis for liability is now much wider,” says Philip Hobson, Financial Lines Manager at Chartis South Africa.
“This means that anyone, including shareholders and staff members, can sue directors and officers directly, which will heighten their personal liability.”
Currently, a shareholder’s relationship with the company means that they can’t, generally speaking, bring an action against officers directly. They have to request the company to bring a law suit against an officer who committed a wrongful act.
However, directors and company officers are unlikely to bring an action against their colleagues, and therefore shareholders have limited recourse to recover damages from wrongful acts committed by company officers.
“Under the new Act, shareholders will have direct recourse against directors and officers in a personal capacity as long as they can prove they have suffered damages,” says Hobson.
This recourse will now be available to a wider range of persons, not just shareholders. Directors will be personally liable for breaches of their fiduciary duties and may be sued for loss and damages caused to creditors, employees, customers, competitors, shareholders or other stakeholders of a company.
For example, if a director makes a bad decision or acts negligently, causing his company to suffer financially, and this results in retrenchment of an employee, that staff member will be able to bring an action against the company officers directly.
Another significant change in the Act is that it specifically provides for class actions by extending liability to a class of persons. Class actions increase the amount of damages claimed exponentially.
Increased shareholder activism and the extension of liability to a wider class of persons means that South Africa is likely to follow the trend in countries like the US, UK and Australia which all have experienced increased litigation against companies, company officers, and directors.
Australia, for example, which has gone through a similar corporate law evolution, has seen claims against directors and officers double in the last 4 years. In the UK, the D&O insurance market is forecast to grow by 27% to £596 million by 2013.
Directors and officers need to be prepared for the changes in the Act and the wider basis for liability, as their own assets will be in the firing line should an action be bought against them. This means they could face very large monetary damages.
Hobson warns that management should make sure they are properly insured for any eventuality.
“Companies, directors and their insurance advisors aren’t well prepared for the risks that could arise from increased shareholder activism and class actions. Considering the Act provides for personal liability, which could cost directors financially, they need to ensure they are adequately covered.”
TAXtalk: www.taxtalk.co.za
All material subject to our Legal Disclaimers.
Recent Posts
- MD Accountants & Auditors Inc. | Budget 2021 25/02/2021
- MD’s Current News | February 2021 23/02/2021
- MD Accountants & Auditors Inc – Section 12J Webinar 16/02/2021
- Trusts welcome DTIC Minister Patel’s support for ownership schemes 15/02/2021
- FORFEITURE OF SEVERANCE PAY 12/02/2021
- MD’s Top Tax Savings Tips – Ahead of the Budget on 24 February 2021!!! 11/02/2021
- UIF launches e-compliance certificate system 10/02/2021
- MD’s Top Tax Savings Tips ahead of the Budget on 24th February 09/02/2021
- Potential taxes to fund the vaccine. Be prepared and plan now before the Budget! 08/02/2021
- Employment Equity Amendment Bill described as a “game-changer” 03/02/2021
- Are you being sold a dubious B-BBEE share option scheme? Hear what the B-BBEE Commission has to say… 01/02/2021
- FILING SEASON 2020: DEADLINE FOR ONLINE FILERS EXTENDED 29/01/2021
- Businesses reminded of City support to offer relief 26/01/2021
- 2nd 2021 Provisional Tax Information Request 18/01/2021
- Changes to the South African Exchange Control Rules 13/01/2021
- MD are now on Instagram too!!! 07/01/2021
- Congratulations to Amanda Kungwayo – 15 years with MD today! 03/01/2021
- PAIA manual | MD ACCOUNTANTS AND AUDITORS INCORPORATED | Date of revision: 15/12/2020 23/12/2020
- Season’s Greetings 21/12/2020
- COIDA: EXCLUSION OF DOMESTIC WORKERS INVALID: Employers’ contributions cannot be backdated 09/12/2020
- Congratulations to Juanita Roman – 20 years with MD today! 01/12/2020
- BEE pioneers fight for their legitimacy 27/11/2020