ENTITLEMENT TO REMUNERATION AS A DIRECTOR OF A COMPANY

A director of a company may receive remuneration in his capacity as a director of a company (such as fees for attending board and board committee meetings) and may also receive remuneration as an employee of a company (for example, managing director). It is possible that a person may not be an employee of a company, but is simply a director of the company and, in that case, such a person will not automatically be entitled to remuneration.

The latter point is affirmed by the provisions of section 66(8) of the Companies Act (“the Act”) [1], which provides that a company may pay remuneration to its directors for their “service as directors” [2]. In other words, there is no obligation on the company to remunerate their directors, unless agreed otherwise and such remuneration is permissible in terms of the Company’s Memorandum of Incorporation (“MOI”).

The dispute in the recent case of Public Investment Corporation v Bodigelo [3] was whether the respondent (Mr. Bodigelo) was entitled to receive payment of directors’ fees and bonuses in respect of various companies where he held directorships on behalf of, and at the behest of, the Public Investment Corporation (“PIC”).

The facts were briefly as follows: at the material time, Mr. Bodigelo worked for the PIC as a manager: private equity and corporate finance. In the ordinary course of its business, PIC invested sums of money on behalf of public sector entities and appointed certain employees, including Mr. Bodigelo, as non-executive directors to the boards of companies in which it had invested. This was to ensure that the funds it invested were spent for the agreed purpose and to participate in the management of these companies to ensure the security of the investment.

Mr. Bodigelo was appointed by PIC as its nominee in a number of these companies. The companies in question then paid directors’ fees and bonuses for the services rendered by non-executive directors, including Mr. Bodigelo. However, on the instruction of the PIC, these fees and bonuses were paid by the companies directly to PIC, and not to the directors personally.

Believing that he was entitled to these directors’ fees and bonuses, Mr. Bodigelo instituted proceedings against the PIC, contending that he was entitled to payment of these directors’ fees and bonuses, which amounted to just over R2,3m.

Mr. Bodigelo’s contention was that he became entitled, as a director of the companies, to remuneration, including bonuses payable by the companies to their non-executive directors. In essence (according to him), when PIC received the amounts in question from the relevant companies it do so on his behalf and/or for his benefit.

On the other hand, the PIC contended that it was entitled to do instruct the companies to pay the remuneration to them as Mr. Bodigelo (like some of their other employees) was not entitled to receive these payments for his personal benefit because, when he performed the function of a director of these companies, he did so as a nominee and employee of PIC. This was part of his functions and duties as manager of private equity and corporate finance of PIC.

Mr. Bodigelo’s claim was dismissed by the High Court, primarily on the basis that, on the evidence presented, he had failed to discharge the onus of proving that he was entitled to payment of the disputed directors’ fees and bonuses. Naturally, he was not satisfied with that decision (given by a single judge) and took the matter on appeal to the full bench of the North Gauteng High Court.

The full bench found in his favour, primarily on the basis that it was not in dispute that Mr. Bodigelo was a non-executive director to the companies in question, with the approval of PIC; that PIC knew that there were directors’ fees and bonuses to be paid to Mr. Bodigelo. Therefore, the Court held, Mr. Bodigelo had established his cause of action and it was up to PIC to prove, on a balance of probabilities, that it was entitled to appropriate for itself the aforesaid amount – an onus the Court felt was not discharged.

The Supreme Court of Appeal (“SCA”) overturned the decision of the full bench and, having characterised the relationship alleged by Mr. Bodigelo as that of principal and agency, held that Mr. Bodigelo bore the onus of proving that PIC received the payments from the various companies in its capacity as his agent. He also bore the onus of proving that PIC accepted the payment as agent for Bodigelo, in the discharge of some obligation by the companies to make payment to Bodigelo.

The SCA, however, found that no evidence was given by Mr. Bodigelo that the payments were made to PIC and received by PIC as his agent. The Court found that, on the evidence, it was clear that payment was made by the companies to PIC as principal and not as agent for Mr. Bodigelo. Mr. Bodigelo accordingly failed to discharge the onus of proving the pleaded cause of action, which was based upon the agency. The SCA concluded, that in performing his functions as a non-executive director on the boards of the companies, Mr. Bodigelo did so as an employee of PIC.

It was not in dispute in the matter that there was no agreement between PIC and Mr. Bodigelo that he would be entitled to board fees and directors’ bonuses payable to him, in respect of services rendered by him as a non-executive director on boards on which he sat at the behest of PIC. In addition, there was no agreement concluded between Mr. Bodigelo and the companies in question which entitled him to remuneration.

Conclusion

The key lesson to be learned by people who are “seconded” by their companies to sit on boards of directors where their employer has an interest is that they need to clarify up front whether they would be receiving any remuneration for doing so or not. For companies, it would be advisable to ensure there is a specific provision in the employees’ contract of employment that regulates these type of relationships.

DISCLOSURE OF DIRECTOR’S PERSONAL FINANCIAL INTEREST

One of the duties imposed on a director of a company is the duty to avoid conflict of interest – this forms part of the director‟s fiduciary duties. This duty has always existed under common law, as gleaned from the decided court cases, but it has now been codified in the Companies Act [1] (“the Act”), under section 75 of the Act.

It is important to note that the section does not only apply to directors (in common sense) but it also applies to alternate directors, prescribed officers and members of the board committees whether such persons are members of the board of directors or not [2]. A prescribed officer can be defined as any person who exercises general executive control over and management of the whole, or a significant portion, of the business and activities of the company, or regularly participates to a material degree in the exercise of general executive control over and management of the whole, or a significant portion, of the
business and activities of the company [3].

In simple terms, a director (in the wide sense) who is in any way interested in a transaction that the company is involved in, or about to be involved in, must declare his or her interest before such a transaction is discussed and decided upon by the company. The duty to disclose also applies where it is not the director per se who has a personal financial interest but it is a person related to that director. The Act defines “personal financial interest” as “a direct material interest of that person, of a financial, monetary or economic nature, or to which a monetary value may be attributed” [4]. An interest held by a person in a unit trust or collective investment is, however, excluded from the definition of “personal financial interest”, unless the person has a direct control over the investment decisions of the fund in question.

It is important to note that the interest in question must not only be direct but it must also be material, i.e. it must be significant in the particular circumstances. What is material will necessarily depend on the facts of each and every case as it is impossible to make any hard and fast rules. It is also important to note that what the Act requires is disclosure of the personal financial interest and not necessarily the approval thereof.

Essentially, what a director (again, in the wide sense) needs to disclose is the following:

• The personal financial interest that he or she, or his or her related person, has and its general nature. This has to be done before the matter is considered by the board of directors; and
• Any material information relating to the matter and known to him or her.

Once the director has made the disclosure, he or she is required to then recuse him or herself from the meeting and must not thereafter sign any document relating to the matter, unless he or she is specifically directed to do so by the board [5]. It may sometimes happen that the director acquires the personal financial interest after the company has concluded the agreement, in which case the Act requires such a director to promptly disclose to the board the nature and the extent of the interest [6]. In view of the fact that the disclosure needs to be made to the board of directors of the company, in cases where the company only has one director but that director is not the only shareholder in the company, the director must disclose to the company’s shareholders [7].

Section 75(2) provides that it is not necessary to disclose personal financial interest where:

• The matter concerned generally affects all the directors in their capacity as directors;
• The matter concerned generally affects a class of persons of which the director is a member unless the only members of that class are the director or a person related or interrelated to him or her;
• The issue relates to the removal of that director from office; or
• The director is the sole director and shareholder of the company.

If a decision, transaction or agreement is approved by the board of directors after the director has disclosed his or her personal financial interest, such a decision will be valid. It will also be valid even if the disclosure was not done but the decision was subsequently ratified by the shareholders, or if an interested person applies to the court for a declaration that such a decision is valid despite the nondisclosure. However, unless the decision is subsequently ratified by the shareholders, the director concerned would be in breach of his fiduciary duty and may be liable for any loss, damage or costs that the company may suffer as a result of such failure to disclose.

Conclusion

In light of the above, it is critical that any person who is a director of a company – bearing in mind the wide sense of the definition of „director‟ – must ensure that he or she discloses any personal financial interest he or she may have in the matter to be discussed by the board. Failure to do so may have dire consequences for the director concerned.