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A director who fails to disclose his personal interest in company contracts risks imprisonment

Failure by a director to disclose a personal interest in company contracts is a criminal offence

Most companies provide in their articles of association or memorandum of incorporation for a managing director.

This is a very important position, for this person is the link between the company's board of directors, where top-level strategic and other decisions are taken, and the company's managers who carry out the instructions of the board and generally run the company on a day-to-day basis.

The managing director would also relay the concerns of managers and other employees to the board of directors.

In essence, therefore, a managing director wears two hats, that is to say, he acts in two different capacities.

As a director he attends board meetings, participates in discussion, and votes on board resolutions (acting in accordance with his fiduciary duty to bring an independent mind to bear on what he believes is in the best interests of the company, and to speak and vote accordingly). As a manager, he carries out the decisions that were taken by the board of directors.

A director is not an "employee" of the company.

In essence, an employee is a person who has a contract of employment and who carries out instructions as to what to do and how to do it.

By contrast, a director is not "hired" by the company, but is "appointed" to his position, usually by a resolution taken by way of a vote at a shareholders' meeting, but sometimes by way of an appointment in terms of the company's articles of association, memorandum of incorporation, or a shareholders' agreement.

A director is analogous to a trustee, in that he owes a duty to act in what he believes is the best interests of a company, in contrast to an employee who must, in law, carry out the instructions of his employer, even if he disagrees with them.

A decision of the Durban High Court affirms and applies these principles

These fundamental principles recently came to the fore in the Durban High Court in the case of Kapsimalis NO v van Tonder [2011] ZAKZDC 40 in which judgment was given in September of this year.

Kapsimalis was the managing director of a company. Apparently, disciplinary proceedings were pending against him in his capacity as an employee. He received a letter from another director, who professed to speak for the company, which said -

"This serves to give you notice that the company is contemplating suspending you from your employment and your position as managing director It is the company's view that it will be untenable for you to continue to perform your duties as the managing director whilst the disciplinary proceedings against you [in your capacity as an employee] are pending"

It was not in dispute that the company was entitled to suspend Kapsimalis as an employee, pending the outcome of disciplinary proceedings. But could the company suspend him as a director?

The High Court answered this question in the negative, holding that that no legal or factual basis had been advanced for the proposition that a director can be suspended from his position.

The shareholders' meeting can, at any time, remove a director from office

The judgment could have gone further (but did not need to) and could have pointed out that the shareholders of a company are entitled, in terms of section 220(1)(a) of the Companies Act of 1973 and section 71(1) of the Companies Act of 2008 to remove a director from office at any time by an ordinary resolution, that is to say, by a simple majority vote - irrespective of what any contract or the company's articles or memorandum of incorporation may say in this regard.

This route could have been taken in the present case.

However, where a director has a contract with the company in terms of which he is to hold office as director for a specified period, a premature termination of his directorial appointment will (unless he has committed a serious breach of the agreement) entitle him to claim damages from the company for breach of contract.

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