COVID-19: Tough Decisions – Business Management and the Role of Directors (Part 1)

by Michael Vieyra: Senior Associate.
Approximate reading time: 7mins

South Africa has not escaped the damaging economic effects brought about by the global COVID-19 pandemic.  The country’s already strained economy is reeling from the adverse effects of the national lockdown and anticipated phased relaxation thereof.  Companies in all sectors are forced to navigate unforeseen and novel circumstances and manage their businesses in terms of the various regulations enacted in terms of the National Disaster Act (“the Regulations”).

As companies continue to operate in accordance with the prevailing laws and best practices, there will undoubtedly be inescapable and tough decisions that companies need to take in respect of the best possible and most responsible measures to rebuild, rescue, restructure or even liquidate their businesses, some of whom may be financially distressed.

Whilst shareholders own a company, its board of directors manage the day – to – day running and operations thereof.  In the circumstances, the responsibility for the operation and management of a company rests with the board of directors and it is therefore critical that directors appreciate what is required of them in terms of the Companies Act, 71 of 2008 (“the Act”) as well as the principles and recommended practices designed for proper governance contained in the Code to the King IV Report on Corporate Governance for South Africa, 2016 (“King IV”).

Section 66(1) of the Act provides that:

‘“The business and affairs of a company must be managed by or under the direction of its board, which has the authority to exercise all of the powers and perform any of the functions of the company…”

Principle 3 of King IV provides that the board of directors “…should ensure that the organisation is and is seen to be a responsible corporate citizen” and principle 6 provides that the board of directors “…should serve as the focal point and custodian of corporate governance in the organisation.”

Section 76 of the Act sets out the standard of conduct expected from a director which extends beyond the common law duty of directors by compelling them to act honestly, in good faith and in a manner they reasonably believe to be in the best interests of, and for the benefit of, the company.

Section 76(3) of the Act specifically states that a director of a company must exercise the powers and perform the functions of a director:

• in good faith and for a proper purpose;
• in the best interests of the company; and
• with the degree of care, skill and diligence that may reasonably be expected of a person carrying out the same functions in relation to the company as carried out by that director, and having the general knowledge, skill and experience of that director.

Principle 6 of King IV further provides that:

“The governing body should comprise the appropriate balance of knowledge, skills, experience, diversity and independence for it to discharge its governance role and responsibilities objectively and effectively.”

Section 76(4) and (5) of the Act contains what is known as “the Business Judgment Rule”.  According to section 76(4), a director shall be deemed to have fulfilled certain of his/her duties provided for in terms of section 76(3) if he/she has complied with certain of the requirements set out in section 76(4).  A director will comply with section 76(4) if the director:

• has taken reasonably diligent steps to become informed about a matter;
• the director made a decision, or supported a decision of a committee or the board, with regard to that matter; and
• the director had a rational basis for believing, and did believe, that the decision was in the best interests of the company.

Having regard to the above, it is clear that it is incumbent on that the board of directors of a company during these uncertain time to increase their knowledge with regard to COVID-19 and matters relating thereto in order that they may perform and fulfil their duties in accordance with those expectations stipulated in the Act and King IV.  Such actions will involve that directors perform their duties, implement business strategies or new business models, which take into account, inter alia, relevant laws in particular the Regulations, employees’ safety having regard to the Occupational Health and Safety Act 85 of 1993, applicable economic support / relief available and such other circumstances which may influence or inform their decisions.

In terms of S76(5) of the Act, in performing and discharging their duties and thus taking such decisions, directors are entitled to rely on the advice of employees, committees or advisors of the company as well as information, reports and opinions provided to them.  This is known as the “Reliance Rule”.  In order for directors to rely on such advice, they must be able to objectively demonstrate that they reasonably believed that the persons advising or reporting to them merit confidence and that they had a rational basis to believe that the all decisions taken were in the best interest of the company.  In addition, directors may not blindly rely on such advice and are expected to consider and if necessary, question the advice provided in order to satisfy themselves of the competency and applicability of such advice to matters relating to their specific company.

In the current circumstances, the Reliance Rule will include advice from appropriate health professionals and those experts, such as attorneys and financial advisors, who are capable of providing advice to the company on, inter alia, the best practice and procedures for the company to comply with the Regulations, so as to minimise the effect of COVID-19 and the risk of non-compliance with the Regulations.  It is therefore recommended that directors obtain such advice from reliable and credible professionals or experts.  If not, directors may be regarded as having failed in their duty to act in the best interests of the company in compliance with the Act and could even be held liable for damages to the company.