The business world has become so complicated that it is easy to overlook the finer details of corporate governance. In smaller private companies, resources are often too valuable and scarce to spend on the legal nitty-gritty. What about the fees paid to directors, and who decides what their fees will be?
What are director fees?
Section 66(8) of the Companies Act states that a company can pay its directors for their services unless the Memorandum of Incorporation (MOI) says otherwise.Â
It is important to understand that directors can be paid for their directorial services apart from receiving a salary for fulfilling another role in the company, provided these are separate and distinct from their directorial duties. A managing director might receive a salary, but also fees for acting as a director. The easiest way to understand the distinction is to think about these directorial duties as the duties that non-executive directors have to fulfil. These duties refer to board-related activities such as attending meetings, preparing for them, and serving on a board committee.
The short answer is that a director can be paid for board-related services rendered as a director. The kicker is that Section 66(9) requires the payment to be approved by a special shareholder resolution within the last two years. No special resolution = no fees. This is the step that is very often neglected in private companies.
Consequences of non-compliance
Ignoring the special resolution requirement in the Companies Act can lead to directors facing the unenviable task of repaying their fees to the Company. The Act is clear: without the special resolution, any payment to directors is unlawful and therefore recoverable by the company. This is to ensure transparency and prevent directors from helping themselves to the company coffers without shareholder approval and oversight.
Can these payments be ratified after the fact? Unfortunately not. The Companies Act's wording suggests that payment without approval cannot be ratified. Section 20 of the Companies Act allows shareholders to ratify actions inconsistent with the MOI but explicitly excludes the ratification of actions that do not comply with the Companies Act itself, such as failing to pass a special resolution. This leaves directors who received unauthorized payments in a precarious position.
If the board chooses not to reclaim these payments, provided they do so without fraudulent intent or gross negligence, they might find protection under the business judgment rule. Nonetheless, should the board fail to act, shareholders have the right to demand action or even initiate a derivative action. However, this is often a complex and burdensome process. Â
Practical implications and recommendations
The risk of non-compliance might not seem immediate, especially if shareholders agree in substance, if not in form. AGM minutes might suggest an agreement was reached on director fees, even if formal procedures were skipped. However, this is not a free pass.
Transparency is key. Shareholders must be aware that their directors are being compensated. Companies should disclose any past non-compliance to shareholders at the next AGM or special meeting and take corrective measures by proposing that the shareholders pass special resolutions to at least ensure that future director payments are lawful.
In any event, if the company's financial statements are required to be audited in terms of Section 30 of the Companies Act, extensive information about directors' remuneration must be included in the annual financial statements, which will be presented to the shareholders. There is not a "loophole" to sidestep the shareholders' right to approve director fees.
If you want to do it properly, establishing a remuneration committee is also recommended. This especially applies to larger companies. The committee can ensure that remuneration policies are fair, responsible, and aligned with the company’s long-term value objectives. The King IV Code suggests that the remuneration policy should cover aspects including directors' base salaries, benefits, incentives, and fees for non-executive directors. However, for small companies, the first focus should just be to comply with the Companies Act and ensure that the shareholders approve director fees by passing a special resolution.Â
Conclusion
Director remuneration is not just about the money. It is about corporate governance and shareholder trust. Compliance with the Companies Act ensures transparency, accountability, and fairness. Companies must take proactive steps to align their practices with legal requirements. Remember, attention to detail is not just about avoiding penalties and getting a clean audit – it is about building a foundation of trust and good governance.Â
If your business' corporate governance needs improvement, book a consultation with Van Zyl Scheepers Attorneys. We are passionate about designing and implementing documents and procedures that work legally and practically. We will focus on fixing your corporate governance issues and preparing its structure for growth to let you focus on building the next big thing.
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