On 11 March 2020, the World Health Organisation declared COVID-19 to be a pandemic. Since then, and on 15 March 2020, the South African Government has declared a national disaster resulting in, amongst other things, the lockdown - which restricts the movement of persons for a period of 21 days from 26 March 2020.
Companies in South Africa are suddenly faced with various challenges and may need to make critical, and rapid, decisions on a range of matters in a short time period. Such potential decisions may include decisions regarding (i) the company's strategy to deal with the COVID-19 crisis, (ii) the manner in which the company's cash flow and employees need to be managed during this period, (iii) potential redundancy procedures under employment law, (iv) providing financial assistance within the group, or (v) seeking contractual relief (or instituting litigation proceedings) due to the lockdown (such as relying on force majeure clauses in contracts).
All of the above potential decisions may have a significant impact on the future, and operations, of a company. As such, the board of directors of a company would need to ensure that all of these decisions are taken in line with the required corporate governance procedures applicable to that company (including, without limitation, the requirements of the Memorandum of Incorporation of the company as well as the requirements of the Companies Act, 2008) to ensure that they are valid in binding.
This issue is of particular importance given that companies are now suddenly faced with the challenge that the applicable decision makers (being directors and shareholders) are unable to attend meetings in person and all potential decisions would, therefore, need to be taken either by conducting such meetings by way of electronic communication or on a round robin resolution basis.
Even though the Companies Act allows for the participation in meetings through electronic communication, a company's ability to make such decisions (through electronic communication) is sometimes restricted in its Memorandum of Incorporation. By way of example, the Memorandum of Incorporation of companies often provide that shareholders are prohibited from voting if it participates in a meeting through electronic communication or stipulates specific requirements that have to be met in order for a resolution to be passed at such a meeting.
When conducting any shareholder, or director, meetings through electronic communication it is, therefore, important to ensure that:
As an alternative to the above, companies may want to procure such decisions on a round robin basis (i.e. on the basis that the decision makers agree to the decision in writing without a need for a formal meeting, as provided for in section 60 of the Companies Act, 2008 (for shareholder decisions) and in section 74 (for board of director decisions)).
It should, however, be noted that certain prescribed matters (such as the business to be conducted at an annual general meeting) may only be considered at a meeting and may not be considered on a round robin basis. Similarly, a company's Memorandum of Incorporation can restrict the business that may be decided on a round robin basis.
To the extent that a particular matter may be decided by a round robin resolution the company should strictly follow the required procedures prescribed in the Memorandum of Incorporation and/or the Companies Act, 2008 for round robin decisions (and, more specifically, the procedures prescribed in section 60 (for shareholder decisions) and section 74 (for director decisions)).
The risk of a failure to comply with these requirements is clearly illustrated in the recent case of CDH Invest NV and Petrotank South Africa Pty) Ltd and others under case number 438/2018 in which the Supreme Court of Appeal found that the applicable round robin resolution was invalid for a lack of compliance with the requirements of the Companies Act, 2008 and more specifically section 74.
With reference to the notice requirement prescribed in section 74 of the Companies Act, 2008, the court held there can be no difference between the importance of a notice where a board meeting is called in terms of section 73 of the Companies Act, 2008 and a notice when the provisions of section 74 of the Companies Act, 2008 are invoked. This would ensure that the directors are made aware of the underlying reasons for the proposed decision and that they are able to make an informed decision on the applicable matter. As such, the court held that the round robin resolution was invalid for a lack of compliance with the requirements of the Companies Act, 2008.
It is therefore critical to ensure that the required notice is given to directors of a company for all matters to be decided on a round robin basis. It would be possible for directors to waive the notice requirement of section 74 of the Companies Act – provided, however, that each director agrees to such waiver.
Accordingly, any shareholder or board decisions taken during the lockdown (which may include urgent and significant decisions), that lack compliance with the terms of the company's Memorandum of Incorporation and/or the Companies Act, 2008, may, potentially, be open to future legal challenge. There is, therefore, a risk that those decisions can be declared invalid and set aside if a company failed to comply with the applicable corporate governance requirements.
Please contact us if you have any questions or if would like our assistance in reviewing your proposed corporate governance strategy for the lockdown.