De facto directors


By Cézanne Britain (Director) and Standré Bezuidenhout (Associate)


Section 66(7) of the Companies Act, No 71 of 2008 (Act) provides that a person becomes entitled to serve as a director of a company when that person has been appointed or elected in accordance with Part F of Chapter 2 of the Act, or holds an office, title, designation or similar status entitling that person to be an ex officio director of the company, subject to subsection 66(5)(a); and has delivered to the company a written consent to serve as its director.

It does however happen that the election or appointment of a director to the board does not comply with the formal and/or procedural requirements of the Act, the company’s  memorandum of incorporation or any rules of the company.

What then is the status of these irregularly elected or appointed directors? What is the status of decisions taken by the board, who have been ‘defectively’ elected or appointed directors to the board? Are the board’s decisions valid? Void? Voidable?

In terms of s214 of the previous Companies Act, No 61 of 1973 (previous Act, “the acts of a director of a company shall be valid notwithstanding any defect that may afterwards be discovered in his appointment or qualification”). In addition the previous Act defined a director to include “any person occupying the position of director or alternate director of a company, by whatever name he may be designated”.

Although the Act provides a slightly broader definition of ‘director’ it does not contain a similar provision to s214 of the previous Act.

S20(7) of the Act codifies the common law Turquand rule and provides that a person dealing with a company in good faith is entitled to presume that the company has complied with all of the formal and procedural requirements in terms of the Act, its memorandum of incorporation and any rules of the company, unless, in the circumstances, the person knew or ought to have known of any failure by the company to comply with any such requirement. However, s20(7) willonly find application in respect of third parties, i.e. persons other than a director, prescribed officer or shareholder of the company.

The categories for ineligible or disqualified directors, in the Act (s69), do not include irregular election or appointment of directors. Would these irregularly elected or appointed directors be regarded as ‘shadow directors’, a concept founded in English law, which has been regarded as the equivalent of prescribed officers?

Would they be regarded as ‘de facto directors’, which is different to a shadow director in the sense that the de facto director performs the functions of a director, but has not been formally elected or appointed as a director? However, even if our courts were to classify irregularly appointed directors as prescribed officers or ‘de facto directors’, it does not fully address the question of the validity of the decisions taken.

Although recent case law has seen our courts dealing with the issue of delinquent directors, our courts have not yet had to deal with this particular issue under the new Act.

A recent case in the Court of Chancery in the state of Delaware in the United States might shed some light on these questions (Bishop Macram Max Gassis v. Corkery, C.A. 8868-VCG [fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][May 28, 2014]). The plaintiff challenged his removal as director, inter alia, on the ground that the majority that favoured the amendment to the bylaw of the company which would cause his removal from the board comprised of directors who had not been “validly seated on the board”, and that the amendment should therefore be invalidated. In addressing this argument, the court found that even if the three defectively appointed members were invalidly elected, they were ‘de facto‘ directors and thus still capable of taking enforceable actions. Accordingly, the court dismissed the plaintiff’s argument and upheld his removal as director.

In the Bishop Macram case it was further remarked that it would be troubling to accept an alternative rule that required the court to call into question all actions taken by a company’s board of directors from the occurrence of any procedural irregularity to the time of challenge, which may span the course of several years.

The court referred to Hockessin Community Center, Inc. v. Swift, 59 A.3d 437 (Del. Ch. 2012) in which a challenge to certain individuals’ statuses as directors based on procedural deficiencies in their election was addressed. The court summarised the position as follows:

“A [d]e facto director is one who is in possession of and exercising the powers of that office under claim and color of an election, although he is not a director [d]e jure and may be removed by proper proceedings. Where a director assumes office pursuant to an irregular election in violation of the provisions of the corporate charter, he achieves only [d]e facto status which may be successfully attacked by the stockholders”.

Whether our courts would take the same approach to the Delaware Courts, as to the validity of corporate actions taken by a board which comprises directors whose appointment has been subject to some irregularities, remains to be seen. The Act does show some leanings towards US law and therefore that system of law may become increasingly persuasive in our courts.[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]