Legal Advice

The duty of directors to act in the best interest of the company under the Companies Act

A director has a legal obligation to act in the best interest of the company to ensure long term business success and the ethical and effective management and leadership of the company to ensure that all stakeholders’ interests are considered.

A director is a member of an appointed board of a company and their role is to ensure, with the powers and authorities vested in them, that the company is compliant with legal requirements and regulations by directing and managing the affairs of the company and taking accountability for the conduct of the company.

Fiduciary Duty of Care
A fiduciary duty is a legal obligation that a director owes a company, and it ensures that the company is managed in the best interest of all stakeholders.

The Companies Act provides for the standards of a director’s conduct in Section 76, and it states that a director has the legal obligation or fiduciary duty to exercise their powers and perform their functions:
  • 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
      o  carrying out the same functions in relation to the company as those carried out by that director; and
      o  having the general knowledge, skill and experience of that director.

Conflict of Interest
It is a legal requirement and duty for a director to avoid conflicts of interest. A director must disclose his personal financial interests, and that of any person or entity related to them, in any matter that is to be considered by the board of the company. The director must then recuse themself from the decision to be taken and they may not vote on that matter.

The Act ensures that directors are held accountable for any such conflicts and that any approved transactions are approved in the best interests of the company. If a director fails to take steps to avoid a conflict, they may be held liable for breach of their fiduciary duty and for any loss that the company suffers as a result. 

Liability for Breaching Duties
Possible legal and financial consequences on a director for a breach of duties:
  • Personal liability in the form of civil or criminal liability in the individual’s personal capacity.
  • Disqualification from serving as a director of a company for a period of time.
  • Financial penalties such as a fine or repayment of loss suffered by the company.

Protection Of Directors from Liability
A director of a company can be held personally liable for breaching their fiduciary duty or for any loss, damages or costs sustained by the company as a consequence of any breach by the director of a duty or their conduct not meeting the required standard as provided for in the Companies Act or the company’s Memorandum of Incorporation. 

The Act however allows for the indemnification of directors and for the purchase of directors’ insurance. Directors’ and Officers’ Liability Insurance therefore offers protection to a company’s directors and its officers (past, present and future) against legal actions arising from the failure to fulfil their responsibilities related to the company. This insurance is important for all companies regardless of size or structure.

When a board of directors is appointed, it is advisable to have a Directors’ and Officers’ Liability policy in place to manage the potential risk exposure faced in these positions. A company can agree to indemnify individuals in these positions by having such a policy, where the Act allows for indemnification.

The role of a director is vital for company health and longevity. The breaching of their legal duties has significant consequences and therefore, upholding these duties is crucial to build stakeholder trust, accountability, and long-term success.

How to handle shareholder disputes and the importance of a shareholders' agreement

Shareholder disagreements can harm a company. A good shareholders' agreement helps manage these by clearly defining rights, responsibilities, and ways to resolve issues, while still ensuring smooth operations.

Apart from being the owners of shares or stocks in a company, thereby being the owners of the company, shareholders are tasked with overseeing the actions of the board of directors they appointed. Because they own shares, they have the right to vote on matters regarding the company.

Role of a Shareholder
  • Determining the vision and goals of the company
  • Appointing, removing and granting powers to directors
  • Deciding on matters that the directors have no power to decide
  • Amending the company memorandum of incorporation (MOI)
  • Approvals of financial statements

A shareholders’ agreement is a legal contract that outlines the rights, powers and responsibilities of a company's shareholders. It also protects shareholders' interests and sets guidelines for managing and governing the company.

The Companies Act states that the MOI (which sets out the rights, duties and responsibilities of shareholders above what the shareholders agreement may provide) will prevail if there is a conflict between the MOI and the shareholders’ agreement. If there is any conflict between the Companies Act and the shareholders’ agreement, the Act will prevail.

Dispute Resolution Mechanisms
Shareholder disputes are conflicts that arise between the shareholders of a company or between shareholders and the company’s management.

 A shareholder's agreement can also help avoid and address disputes among shareholders by providing a clear framework for dispute resolution by including a dispute resolution clause setting out the steps to follow if conflicts arise. These dispute resolution mechanisms include negotiation, mediation, arbitration, and litigation if necessary.

 A shareholders’ agreement helps prevent costly and lengthy legal battles by offering alternative conflict resolution methods. It encourages shareholders to follow agreed procedures, saving time and resources:
  • Negotiation and Mediation: Shareholder disputes are often first addressed through direct negotiation or mediation, offering a less confrontational approach that helps maintain business relationships.
  • Arbitration: If mediation fails, arbitration can be a more efficient and private alternative to resolve disputes compared to going to court.
  • Litigation: As a final option, disputes may be taken to court, where a judge will deliver a binding decision.

Benefits of Alternative Dispute Resolution Mechanisms:
  • Cost effectiveness – incur lower costs than litigation which goes on for longer.
  • Duration of proceedings – produce outcomes faster unlike court proceedings that have multiple and longstanding postponements.
  • Confidentiality – processes remain confidential, records and sensitive information are not for public viewing, unlike court proceedings.
  • Flexibility of process – parties can control the process and tailor it to suit their specific needs, unlike in court proceedings.
  • Less disruptions – less disruptive processes to the business and its ongoing operations.
  • Preservation of relationships – because open communication and collaboration is encouraged, it helps the parties preserve the business relationship.


Deadlock situations and Last resorts
A deadlock happens when votes for and against are equal and nobody has a casting vote. Such situations can possibly be resolved by the inclusion of a deadlock provision in the shareholders’ agreement or the company’s MOI which can provide for the following:
  • Status quo: if the shareholders cannot resolve a deadlock, the status quo will prevail. This means no changes or new actions will be taken, which could delay critical decisions and impact the company’s operations.
  • Buy-Sell Agreement: Each shareholder submits a sealed offer to an independent third party, usually the company’s auditors, stating the price they are willing to pay for the other shareholder's shares. All bids are opened at the same time, and the shareholder with the highest bid must buy the other shareholder’s shares at the lowest price. This ensures a clear resolution by forcing one party to exit while maintaining the company’s continuity.
  • Russian Roulette: a shareholder can notify others, offering to either buy them out at a set price or have them buy the issuing shareholder at the same price. This mechanism ensures that one party exits while avoiding prolonged disputes, often leading to a fair outcome since the initiating shareholder must accept the same terms.
  • Alternative dispute resolution: which can include neutral third parties or experts. Such mechanisms aim to resolve the conflict without resorting to litigation, often saving time and costs while preserving relationships.
  • Put and Call Options: provides shareholders with the right, but not the obligation, to sell (put) or buy (call) shares at a predetermined price. This creates a structured way to exit or acquire shares, offering flexibility and clarity in resolving the deadlock.
  • Liquidation: If all else fails and shareholders are unable to reach an amicable solution, the shareholders may opt to liquidate the company. This is typically a last resort, resulting in the cessation of business operations and distribution of the company’s assets among shareholders.
  • Chairman’s Casting Vote: the chairman of the board may be given an additional casting vote to break deadlocks during board meetings. This empowers the chairman to make a decisive call, allowing the company to move forward with decisions and avoid stagnation.


A shareholders' agreement is vital for handling disputes efficiently and cost-effectively. By outlining clear processes and addressing deadlocks, it protects shareholder interests and ensures the company's stability and ongoing success.

Legal requirements for maintaining accurate minutes of board meetings

Accurate minutes of board meetings are essential for legal compliance, transparency, and accountability. They record important decisions, votes, and actions, helping protect the company and its directors from potential.

The significance of proper record keeping in board meetings is that it takes note of and keeps record of important matters tabled at sittings, such as decisions made, votes taken, follow up tasks, important event information, any conflicts of interest and dissenting (opposing) views. It is also important to keep such records for transparency and dispute resolution purposes as requests can be made by members. It provides an overview of what has been accomplished by the board over time and holding members accountable for decisions made. It is also important to keep record to be compliant with legal requirements.

Failure to do so will result in non-compliance with legal responsibilities and fiduciary duties, which ultimately exposes the company and the directors in their personal capacity to risk.

Key elements of a boarding meeting:
Section 73 of the Companies Act regulates board meetings and requires that minutes must amongst other things include:
  • Meeting essentials: date, start time, and location
  • Attendees and absentees
  • Quorum verification: a meeting quorum must be met for the decisions made to be deemed legitimate.
  • Agenda items discussed
  • Decisions taken and resolutions adopted
  • Declarations of personal financial interests and any conflicts of interest
  • Action items and responsibilities: who will be accountable for follow-up tasks
  • Voting outcomes.

For companies of a certain size or complexity, appointing a company secretary can be invaluable. A company secretary ensures that meetings are conducted in line with legal and governance standards, oversees the preparation of minutes, and advises on corporate compliance. For smaller businesses or less formal meetings, an administrative assistant or traditional secretary may suffice to manage basic record-keeping and administrative tasks.

Maintenance of Minutes
The Companies and Intellectual Properties Commission (CIPC) requires that companies maintain their company records. Section 24 of the Companies Act requires that minutes of shareholders and board meetings and resolutions be kept and stored for a period of seven years after the date of the meeting or the date on which the resolution was adopted, as these form part of the company records. These records must be kept as hard copies or in an electronic format and must be accessible at the company’s registered office or from another location that is within South Africa.

Maintaining proper minutes are essential for legal compliance, transparency, and accountability, as this protects the company from potential risks and disputes.

Filing annual returns with the Companies and Intellectual Property Commission (CIPC)

Filing annual returns with the Companies and Intellectual Property Commission (CIPC) is a crucial legal obligation for companies and close corporations in South Africa. This process ensures your business remains in good standing and avoids penalties or deregistration.
What Are Annual Returns?
Annual returns are a way for businesses to confirm and update their registered details with the CIPC. These details include:
  • Contact information (address, email, and phone number)
  • Director or member details
  • Company status and compliance
Who Needs to File?
All companies (private, public, and non-profit) and close corporations must file annual returns. Sole proprietors and partnerships are exempt, as they are not registered entities with the CIPC.
Submission Timeframes
Companies must file annual returns within 30 business days starting from the day after its date of registration. Close corporations must file starting from the first day of the month it was registered up until the month thereafter. It may still file after this time period, but an additional penalty fee will apply.
Non-compliance with the Companies Act
There are cost implications for late filings but continuous failure to file annual returns (two or more consecutive returns) within the prescribed time, it will be assumed that the business is inactive and the CIPC will start the deregistration process to remove the business from its active records, until final registration. After two missed annual returns, the company will be moved into "AR Final Deregistration," meaning the company ceases to exist as a legal entity.

To cancel deregistration by the CIPC due to non-compliance with filling of annual returns while the deregistration is still in process, ensure that all outstanding returns have been submitted and fees and penalties have been paid before the date that the company is finally deregistered. To reinstate a company that has already been deregistered, specific proof is required. It must be shown that the company either held immovable property or was active in business at the time of deregistration. Alternatively there is an issued court order re-instating the company. In addition, the company must apply for re-instatement by filing of a Form CoR40.5 and submitting the required supporting documents. At the same time, all outstanding annual returns must be submitted.

Complying with the filing process is crucial for maintaining a company’s legal status and avoiding penalties or deregistration. By adhering to filing deadlines and addressing non-compliance promptly, companies ensure their continued existence and avoid costly repercussions.

Take note that an annual return with the CIPC is not the same as a tax return with SARS.

Identifying and mitigating financial risks through governance frameworks

Identifying and mitigating financial risks is key to a company’s long-term success. Good governance helps businesses proactively address financial challenges like cash flow and market changes, leading to better decisions.

Financial risks range from internal issues like cash flow and credit issues, to external pressures that are uncontrollable such as market trends and fluctuations. Companies should take a proactive approach to strengthen the business against future uncertainties and financial weaknesses. For a business to survive and for better-informed decisions to be made, it is important to identify and to strategically manage such risks.

Financial risks can be identified by the:
  • analysis of financial statements;
  • assessing external market trends and conditions;
  • regular internal audits as well as external audits when due to determine irregularities; and
  • keeping up to date with regulatory changes.

Top financial risks affecting SMMEs
  • Liquidity and insolvency – liabilities exceeding assets and not having enough cash readily available to meet short term obligations.
  • Cash flow and credit – unnecessarily borrowing money resulting in the business being unable to manage its debts owing, lenient credit policies resulting in late payments by clients and being unable to manage debts owed to it. This consequently leaves the business in debt and not having an adequate cash flow.
  • Financing, funding and investments – dependence on a limited or single source of funding causes small businesses to be financially vulnerable as the source may be slow to pay or cease. Inappropriately selecting investors can cause misaligned business goals and expectations on deliverables.
  • Under-pricing products/services – when prices are set too low, the business will fail to cover costs or to make a reasonable profit.
  • Non-compliance with legal frameworks – non-adherence to laws like the Companies Act may result in penalties and fines.
  • Tax compliance and liability – industry specific regulations must be complied with otherwise risk facing penalties and fines.
  • Operational inefficiencies – Failure of internal processes result in higher costs and lower productivity, negatively impacting the overall profitability of the business.
  • Cybersecurity threats – data breaches, hacking and other cyberattacks, compromise sensitive business information and can stop business operations. This results in financial costs to remedy the problem as well as having to invest in cybersecurity measures.

The Role of Governance Frameworks
Governance frameworks provide a structured approach to decision-making, risk management, and accountability. They ensure that financial risks are proactively identified, monitored, and mitigated. For a business owner, a well-designed governance framework must align with local regulatory requirements and business goals.

Steps to Identify and Mitigate Financial Risks

1.  Conduct a Risk Assessment
Begin with a comprehensive evaluation of potential risks:
  • Analyse Financial Data: Review income statements, balance sheets, and cash flow statements for patterns indicating vulnerabilities.
  • Engage Stakeholders: Involve team members, accountants, and advisors to identify risks from multiple perspectives.
  • Monitor the External Environment: Consider economic trends, exchange rate fluctuations, and changes in legislation. Adapt to market changes and plan proactively.

2.  Develop a Risk Management Plan
Once risks are identified, develop a plan to address them.
  • Prioritise Risks: Focus on those with the highest likelihood and impact.
  • Set Controls: For example, limit credit exposure by conducting due diligence on customers and setting payment terms.
  • Establish Reserves: Build cash reserves to handle unforeseen events like late payments or economic downturns.

3.  Implement Governance Policies
Policies serve as the backbone of a governance framework. Examples include:
  • Financial Oversight Policy: Define roles and responsibilities for financial decisions, ensuring accountability.
  • Internal Controls: Introduce checks such as dual sign-offs for significant expenses or audits to detect irregularities.
  • Segregation of Duties: this is an internal financial control that helps prevent fraud and errors by ensuring that no single person is responsible for every stage in a process from beginning to end, thus breaking down the processes and delegating to different personnel.
  • Compliance Tracking: Regularly review adherence to tax, labour, and industry-specific regulations to avoid costly penalties.

4.  Use Technology for Monitoring
Digital tools can enhance the governance framework by providing real-time insights into financial performance.
  • Accounting Software: Use platforms like Sage or Xero to automate invoicing, track expenses, and generate financial reports.
  • Risk Management Tools: Tools like risk assessment dashboards can help identify potential threats early.

5.  Establish a Decision-Making Structure
A clear hierarchy for decision-making helps avoid impulsive or poorly thought-out financial decisions.
  • Board of Advisors: Even small businesses can benefit from an informal board of experienced professionals.
  • Regular Reviews: Schedule periodic meetings to evaluate financial performance and reassess risks.


6.  Train and Educate your Team
Employees play a crucial role in risk mitigation. Equip them with the knowledge and tools to recognise and report financial anomalies.
  • HR Responsibilities: Sensible hire labour and manage human resources effectively.

A good governance framework helps businesses manage financial risks. By identifying risks, implementing controls, and fostering a culture of accountability, a business owner can navigate uncertainties confidently and sustainably. Embrace governance not as a burden, but as a strategic advantage that secures the business’s future.

Governance and IT

In South Africa, governance and IT have gained significant attention due to the increasing reliance on technology in various sectors, including government and businesses. South Africa has established legal and regulatory framework to govern IT practices. The Protection of Personal Information Act (POPIA) and the Cybercrimes Act are examples of legislation aimed at safeguarding personal data and combating cybercrime.

The Department of Communications & Digital Technologies oversees IT regulations in the country. The Ministry has programmes that assist government and businesses to ensure that they are well equipped in IT.

How companies can control IT governance – Effective IT governance requires the establishment of governance structures within organizations. This includes the appointment of IT steering committees, the allocation of responsibilities, and the implementation of IT policies and procedures.

Why it is important - Organisations are required to implement appropriate measures to secure personal information and ensure compliance with data protection regulations.

South Africa recognises the importance of digital transformation. The government has initiatives such as the Digital Economy Masterplan and the Smart City Framework to promote digitalisation and harness the benefits of emerging technologies.

Governance and AI

Governance and Artificial Intelligence refers to the policies, frameworks, and practices that govern the ethical and responsible development, deployment, and use of AI technologies.

The South African Government's AI Framework, released in 2019, emphasises the importance of responsible and ethical AI practices, including fairness, transparency, accountability, and respect for human rights.

In 2022 the government launched the Artificial Intelligence Institute of South Africa. The launch is to assist government in being one of the countries on the forefront of the 4IR. The Artificial Intelligence Institute of South Africa plays a pivotal role on how AI is implemented in the country.

South Africa is in the process of developing a regulatory framework to govern AI. The proposed Data and AI Authority Bill aims to establish a regulatory body that will oversee data protection, AI ethics, and governance, ensuring compliance with ethical and legal standards. Upon its enactment, businesses will be obliged to comply with the Act.