Director’s duties – five things you need to know

There has been a lot of media coverage in the past couple of years devoted to directors’ duties under the new Companies Act of 2008, and the fact that directors can be held personally liable if they breach those duties. The effect can be fear and uncertainty – but the basic principles are easy to understand and live by. There are five things every director should know:

1. What exactly is a “fiduciary duty” anyway?

“Fiduciary” comes from the same Latin word for faith and trust that’s given us “fidelity” and “confidence” (it’s also why there’s a tradition of calling dogs Fido). Basically, if someone places their faith and trust in you – for example by giving you their money to invest or their company to manage – you have a duty not to betray that trust. You have to be loyal and act in their best interests, not your own. It’s really that simple. The moment you find yourself thinking in terms of what’s best for you personally, take a deep breath and a long cold drink of water and think again.

2. What is a “duty of skill and care”?

As a director, you don’t only have to act in good faith – you have to know what you’re doing. The expection is not that you should be an expert, or never make a mistake – but you should have the skills that can reasonably be expected of someone in your position, and apply those skills. You can’t, for example, approve a deal because it feels right in your gut or the other person is in your church and you’re sure you can trust them. You need to do all the due diligence required to make sure it will benefit the company.

3. It doesn’t matter how big or small the company is

These duties apply equally to directors of small companies, large listed companies and non-profits. It gets more scary and complicated the more of other people’s money is at stake, but your basic duties and responsibilities to your shareholders remain the same.

4. It doesn’t matter what it says on your business card

You don’t have to carry the name of Director to bear these responsibilties. The law puts it in more complicated terms, but basically: If it looks like a duck, and walks like a duck, and quacks like a duck, it’s a duck. So if you attend board meetings, make important decisions, sign off on deals and do other things that directors do, the law will regard you as a director. You can’t avoid the responsibility by steering clear of the name.

5. When in doubt, always opt for more transparency

The law is absolutely clear that you may not use your position to make any kind of secret profit, whether the company loses out or not. If you set up your own new company to take advantage of a major opportunity offered by a client, that’s a clear breach of your duties. But things that seem more innocuous can also be breaches: What if a major supplier offers you a discount when you renovate your house? Even if there’s no expectation of reward, this could still breach your duties. Honesty, as always, is the best policy: Tell the board and let them decide.

In many ways, the Companies Act just codifies in law what most people regard as basic ethics and common sense. If your habit is to act in good faith and care, you’re unlikely to have any problems. But anytime you’re in doubt, seek advice – – it’s always better to know what you’re getting into.

The Consumer Protection Act (CPA) regulates your marketing activities

I have previously heard someone saying: “Now that the CPA is in effect, it will be almost impossible to be creative in one’s marketing material – future marketing will be boring!”

Whether this is true or not is debatable, but the bottom line is that marketers need to be careful: the CPA provides for some clear rules when it comes to marketing. Some marketing practices are being prohibited outright whereas other marketing practices are allowed, but regulated strictly. There are in addition some general rules that apply to all types of marketing.

The intention of the CPA’s marketing provisions is clear: you may not mislead your consumer! This means that you will need to consider your marketing material and be sure that your average consumer will understand the message and not be misled.

There are a number of CPA sections dedicated to marketing. The reason is obvious: in our country there are a lot of uneducated and vulnerable people who may in the past have been lured into purchasing products or services for which they had no use. Because marketers were so clever and portrayed a convincing, but untrue, message about certain products which ultimately induced consumers to buy them, the legislator deemed it appropriate to provide some protection to these vulnerable members of society by creating rules that apply to marketing activities. The rationale of these rules is therefore that people should not be persuaded to spend their hard-earned money on products or services that do not have the qualities being portrayed in the marketing material.

We will discuss the various different marketing provisions in more detail in future posts. For now it is important to take note of the following:

  • The general rule is that your marketing material may not be “false, misleading, or deceptive” in any way – whether direct or indirect;
  • Some forms of marketing are prohibited. These include bait marketing (where you “bait” potential consumers into your stores while you know that you do not have stock of the ‘bait item’ to sell to them) and negative option marketing (where the consumer will be deemed to enter into an agreement if the consumer does not clearly decline a particular offer);
  • Promotional competitions, loyalty schemes, promotions and catalogue marketing all have a lot of rules that apply to them and each time that you run any of these types of campaigns, you need to consider the rules very carefully to ensure that your campaign will comply with the CPA requirements;
  • Direct marketing is not prohibited by the CPA as some people may believe. BUT a lot of rules apply, and once the Protection of Personal Information Bill comes into effect, even more rules will apply.

About Dommisse Attorneys
Dommisse Attorneys can assist you with your marketing campaigns to ensure compliance in terms of the CPA. For more information you can contact us by sending an email to

POPI: Is “consent” the beginning and the end?

True or false: if you do not have the person’s consent, you cannot use his personal information? From a lot of articles available on the internet, it would seem that the answer to this question must be ‘true’. But is this really the case? Can it be true that unless, for example, I consent to you collecting on debt (money that I owe you and that you are entitled to collect from me in terms of the law) you may not process my personal information and you may not share it with debt collectors? Surely this cannot be the case.

The answer lies in section 11 of the Protection of Personal Information Bill (POPI), which is anticipated to soon come into effect. Section 11, “Consent, justification and objection”, forms part of the second condition for lawful processing, named “processing limitation”. The aim of this condition is, in general, to make the responsible party aware of the fact that that there are some limitations on the processing of personal information and gone are the days where a responsible party could process personal information as and how it pleased.

A lot of people make the mistake of only reading section 11(1)(a) which states that: “Personal information may only be processed if— (a) the data subject or a competent person (where the data subject is a child) consents to the processing”. These people then take the view that if there is no consent, the processing will not be allowed. However, section 11 also makes provision for other justification grounds – meaning that even though there is no consent, the responsible party can “justify” why he is processing the personal information through other means.

The other justification grounds include the following:
1. If the processing is necessary for concluding a contract to which the data subject is a party or it is necessary to perform under such contract;
2. If the processing complies with an obligation imposed by law on the responsible party (an example might be processing for purposes of complying with legislation such as RICA or FICA);
3. If the processing protects a legitimate interest of the data subject;
4. If the processing is necessary for the proper performance of a public law duty by a public body;
5. If the processing is necessary for pursuing the legitimate interests of the responsible party or of a third party to whom the information is supplied.

From this it is clear that even if you do not have the data subject’s consent to process personal information in a particular situation, the law may still allow you to process it if you are able to rely on one of the grounds listed above.

It is important to understand however that different rules will apply to electronic direct marketing. This is dealt with in a separate section of the Bill – section 69. We will provide more information on this in a separate post in due course

Promotional competitions: the dos and the dont’s

We have all received the phone call or sms to say: “Congratulations, you have won!” (Often some exotic holiday), only to find out that you have not won any prize! You are no winner! Oh no! Now you need to attend some meeting, or purchase “points” in terms of some kind of scheme. So where is the so called prize?

This recently happened to someone I know. He received a sms – informing him that he had won R950 000. So we phoned… and what a surprise, after some questions and statements from our side (including of course a reference to the CPA), the person on the other side hung up. And hung up again when we tried to phone again. And again.

So what does the law say?

Before the Consumer Protection Act 68 of 2008 (“CPA”) came into effect, promotional competitions were governed by the Lotteries Act 57 of 1997 and Regulations. These pieces of legislation were difficult to interpret, which resulted in a lot of confusion and difficulty in compliance with the requirements. Since the enactment of the CPA, promotional competitions are regulated by section 36 and regulation 11 of this Act. The CPA does not outlaw promotional competitions. BUT: it regulates promotional competitions – meaning that a lot of rules apply.

A few of the DO’s:

  1. Check your “offer” to participate (your marketing material) – you need to specify some information during this process (participants should know what they are in for);
  2. Compile competition rules in accordance with the CPA requirements;
  3. Instruct an independent party to oversee and certify the conducting of the competition;
  4. Retain some specified documentation for a period of 3 years.
  5. A few of the DON’TS
  6. Don’t tell anyone that they have won a competition if they have not actually won it;
  7. Don’t charge an entry fee (a requirement that a participant must purchase goods or services to enter will be allowed in certain circumstances);
  8. Don’t force the winner to be present at the prize draw;
  9. Don’t force the winner to participate in marketing activities;
  10. Don’t charge more than R 1.50 for an electronic entry.

We are geared to assist promoters with the review and drafting of their customer facing documentation for promotions, competitions and similar campaigns. We can also assist with the actual prize draw (or oversee the process) and report on your compliance with the provisions of the CPA.

Post-investment: Be prepared for growing pains

If your business has survived the first two to three years, and you want to continue growing it, there’s a strong chance you’ll be looking for an investor. But be careful what you wish for: The dream investment and the glow of success will bring growing pains, which will be more painful than you imagined.

In many companies I’ve worked with, there is a moment not long after that first big investment when the founders look at each other and think “Was R20mln/R30mln/R50mln worth putting up with this?” Suddenly they’re being faced with apparently unreasonable demands for new structures and processes that seem like a massive distraction from core business focus. This is the moment when it feels like you’re drowning in red tape, the interfering investor has no clue how the business really works, you’re losing your competitive edge and the whole thing has been a horrible mistake.

If that describes you, take a deep breath. If there’s any chance this could be you in a couple of years’ time, listen carefully: That pain is a normal part of the growth experience. Embrace it.

We South Africans have a fantastic ability to create new stuff out of nothing, sailing off into uncharted waters on “boer-maak-’n-plan” makeshift vessels that achieve great things. Our maverick tendencies make us really good at start-ups. But if you want to make it out of the world of plucky pioneers into the big leagues, you’re going to have to adapt.

Adapting means qualitative change, not quantitative: think of it as building the infrastructure that will maximise profitability when growth comes.  Proper systems and corporate governance structures, compliance, regular structured forecasting, budgeting and reporting, all the infrastructure that will be needed to support the business safely through the next wave of growth.

In fact, a fair chunk of a typical R20-R50m investment should be spent precisely on creating those structures. You can’t become a R200m or R2,000m company if you’re still acting like a R2m company. All that tedious bureaucracy – the board charters, the audit committees, the renegotiated employment contracts – is laying the groundwork for the future.  But bear in mind the important point: the actual cash should be the very least of what an  investor in your business should bring. Far more valuable in the long run is the active involvement of someone who has been there and done that: the strategic alliances, the operational know how, the connections and the experience and knowledge they bring.

Really tap into the investor’s experience in everything from product efficiency to bonus pool structures.  If they have requested a board seat, make them work!  Appoint them to the sub committees and involve them in weekly calls.  Appreciate their need for reporting and their need for transparency, how else can they give the guidance that will add a zero to your company valuation?

You’ll probably go through a phase of regretting the investor along the way, but that’s ok, if you have chosen the right investor.  If you’ve ever seen a martial arts movie the story arc should be familiar: There’s always method in the master’s madness.

There will be sacrifices, notably your complete independence of decision making. But the rewards of growth will far outweigh them.  If you can prove that you have the strength and discipline to run a business in which you are the custodian of other people’s money, not just your own, the world is your oyster.

Amendments to the National Credit Act

The National Credit Act (NCA) came into effect on 1 June 2007. One of the objectives of the NCA was to stop credit providers from providing credit to consumers who could not afford the credit. Six years down the line and the unfortunate reality is that a rather large percentage of credit consumers are in fact over-indebted. Fingers often point to credit providers and whether their business practices are in line with the NCA requirements. It is therefore imperative that credit providers revise their processes to ensure that they conduct business in accordance with the spirit and intent of the Act.

Considering the current credit position in our country, it is clear that despite the good intentions of the Act, some of the content needs clarification. On 29 May 2013 the Department of Trade and Industry therefore published the draft Amendment to the Bill, together with the draft Policy Review Framework, with the stated aim being to address problem areas identified in the practical
application of the NCA.

Some of the proposed amendments apply to the following aspects of the Act:

1. Amendments to some definitions like the definition of “lease” and “secured loan”;
2. Registration of debt counsellors;
3. Cancellation of registrations;
4. Changing the conditions of registration;
5. Suspension of reckless credit agreements;
6. Consent of spouse where married in community of property;
7. Registration and accreditation of alternative dispute resolution structures and agents.

Depending on your business model, some of the proposed amendments may have a big impact on your business operations. It is therefore necessary that you review current practices, and also consider the approach that the National Credit Regulator is likely to take in future.

Consumer law expert Jana van Zyl rounds out Dommisse Attorneys team

Commercial law firm Dommisse Attorneys has been joined by new partner Jana van Zyl, an expert in consumer law, following the firm’s recent acquisition of RTK Attorneys.

“Jana’s presence on the team means we can offer a rounded set of compliance and commercial skills to our clients,” says lead partner Adrian Dommisse. Many of the firm’s clients are in the ICT industry, and Dommisse says there is an increasing need for guidance on how to comply with the raft of new consumerrelated legislation that has been introduced in recent years.

The more recent laws include not just the Consumer Protection Act (CPA), but also the National Credit Act (NCA), the Electronic Communications and Transactions Act (ECT), and more recently the Protection of Personal Information Bill (POPI) which is expected to be enacted soon.

“POPI compliance will need to be considered by any business who processes information” says Van Zyl, who is assisting several large clients in the retail industry, “and a compliance project can be a significant exercise. Typically one would conduct a gap analysis, develop an action plan and then help the client to implement appropriate business processes.”

On CPA side, Van Zyl says clients also often ask for one-off consultations and opinions relating to the application of the CPA to their particular business operations. These could include everything from the wording of customer facing documentation, policies and competition terms to how to practically implement a particular section of the legislation.

“Training is a fairly large component of what I do,” she adds. “A number of common practices around marketing and promotions, for example, have had to change with the introduction of the CPA and POPI will add to that once enacted. Clients often need in-depth training before they can understand and implement the new laws in their everyday business practice.”

Want a new investor for your business? Six housecleaning tips for success.

Many businesses, especially in the technology sector, are started with the idea of selling them one day. Even if that isn’t on the cards, it’s a rare company that won’t one day want outside investment to grow the business, whether you’re seeking venture capital from an international fund or a new partner to take up a shareholding. In either case, your task as a business owner will be immeasurably easier if you lay some basic legal groundwork early on.

The essential principle to keep in mind is this: complication and clutter can alarm Investors. The less complex your capital structure and financial statements, the more reassured they can be that they know exactly what they’re getting themselves into.

 So here’s a checklist of things to put in place before you ever need to open your doors, and your books, to a potential investor:

  1. Keep things tidy. Start -ups and young companies typically have multiple loans and elaborate contracts designed to help fund growth in the early days, for example, loans which are convertible into shares or even by granting an option to a landlord in return for lower rent. If that’s you, take action now to consolidate your balance sheet, especially your loan funding, as much as possible.
  2. Maintain a clean shareholding structure. Where there are lots of “rats and mice” minority shareholders there is potential for      uncertainty and confusion for investors.  Beware of giving real shares to your employees (as opposed to phantom shares or other instruments that track the value of the company). However, fundamentally valuable members of the management team MUST have an equity incentive of some sort.
  3. Allocate shares to your founders and anchor investors early on. The later you leave it, the more value they have, and the greater the tax hit will be (gifted shares can be taxed as income, so tax may be payable now, on a share that can’t be sold for years).
  4. Give up any thoughts you may have of recouping all that sweat loan account in cold hard cash – here we are talking about salary’s sacrificed or other money foregone. It’s very unlikely you’ll find an investor who’ll be prepared to treat sweat loans by a founder as a true cash loan. If you actually dipped into your own pocket for cash to fund operations there’s a better chance, but in reality almost all the founders’ sweat loan funding may be written off when a new investor comes in. Rather pay yourself decently from the start – then loan that cash back to the business, and keep a written record of your loan arrangement!
  5. Take a good hard look at your board: Do the directors add real value to the business or are they largely family members, angel investors and other founders with experience as limited as your own? Look for board members who can provide useful advice and guidance, and whose CVs will make you look credible to potential investors – remember, they are buying into the executive team.
  6. Especially relevant for software and other IT companies: Check who actually owns your fundamental means of production! If you’ve built a product, be extremely careful that you own the “building blocks” and/or have a valid license to use those components. In the case of open source software, are you within the licence terms? Also make sure that your employees have all properly assigned to you the intellectual property rights to anything they develop in the course of their employment.
  7. Pay attention to all the standard due diligence issues: Make sure all existing contracts (employment, supply, lease, etc.) are in place and up to date and not overly skewed against you, that your incorporation documents are up to date, and so on.

While much of this looks like basic common sense to lawyers, in reality many entrepreneurs just don’t get around to these details – they’re too busy doing the work. If you’re one of those, it’s time to seriously consider interviewing some lawyers to find out what they can do for you. If nothing else, it could save you a fortune in a few years’ time.


Companies Act deadline an opportunity to “get house in order”

If you’ve been slack in complying with the Companies Act of 2009, the April 2013 deadline probably has you sweating bullets, but according to attorney Adrian Dommisse, there’s no need to get hysterical. Dommisse Attorneys’ Tracy Hockly says companies who are in the process of becoming compliant have nothing to worry about, but should use the opportunity to review their founding documents.

Since the Act was passed in 2009, companies were granted a two-year grace period to ensure that provisions in their founding documents, such as shareholders’ agreements, are in accordance with the 2009 Act. According to Hockly this means that information in your founding documents that conflicts with the new Act is null and void. “Perhaps most importantly, anything in your shareholders agreement that is inconsistent with the Act or the MOI is null and void,” she said.

While Hockly believes owner-managed private companies aren’t really affected by the ghosts of deadlines passed, the deadline is a good reminder to “get your house in order”. “The end of the grace period doesn’t mean you can no longer amend your MOI, or that you’ll be charged any penalty for failing to do so (aside from a nominal fee for the amendment, payable to the CIPC). But you do need to know that the assumptions you’re operating under are correct,” she warns.

The situation is more urgent for those who have two or more shareholders, especially if there is a difficult relationship between shareholders. If you aren’t completely confident that your rights under old founding documents are adequately protected under the new Act, it’s wise to
check with an attorney how best to deal with this as soon as possible.

Hockly advises preparing a good brief, should you decide to approach an attorney to review founding documents to keep costs down.

“As well as your existing documents, be sure to include exact details of all your current shareholders and directors, how directors are appointed, how decisions should be made, and any agreements you currently have in place around transfers of shares, loan accounts and soon. If you’re thinking of bringing in an outside investor or selling shares, mention it; and also point out any red flags or areas of actual or potential conflict. Write down all the questions you have before any meeting, and don’t be afraid to ask what might seem like stupid questions.
The new Act is in many ways intended to be less onerous and better for business than the old version, so it’s to your benefit to develop a good grasp of the basics.”

What you need to know about offshoring your business

How to move one’s business offshore is a popular topic among entrepreneurs – but, says corporate law expert Adrian Dommisse of Dommisse Attorneys, the decision is not as easy as many seem to think.

“There is lots of excitement about Mauritius because their corporate tax rate much lower (potentially just 3% as opposed to 28% in South Africa), but offshoring needs to be a substantial and genuine exercise – just because you think you can avoid tax is the wrong way to go about it,” says Dommisse. “SARS is very aware of this issue. If you have a company registered in Mauritius but all your management and employees are in South Africa, you’re going to attract unwelcome attention.”

Dommisse says there are two good reasons companies should consider establishing an offshore office: If they’re genuinely expanding their activities beyond the borders of South Africa, or to meet the needs of major international investors.

In the first case, says Dommisse, entrepreneurs should be aware that there are major costs associated with setting up offshore.  “There must a real separation between your South African and international operations. You can’t just have a postal address in Mauritius but still run everything from Johannesburg: there needs to be real substance.”

“You will need to prove to anybody enquiring that key management decisions are made in the offshore jurisdiction,” he adds. “That means local offices, resident senior staff and all your board meetings will need to be held there, just for starters. That cost will need to be weighted against the benefits of actually running a business from that office. So if you’re genuinely looking for a good base from which to expand into South Asia, for example, go for it.”

Dommisse also cautions against “loop structures” in which South Africans have an interest in an offshore holding company that in turns owns assets in South Africa. “It’s a fairly obvious way to try and avoid paying tax, and it could make criminals of your entire board,” he says. “It’s a rookie mistake.”

The second reason to consider setting up offshore is to secure a major international investor who is wary of putting money into South Africa because of currency and political risk, the tax regime and exchange control regulations.

“The truth is that investors will only put their capital into a country like South Africa if they can take it out again easily,” says Dommisse. “We see investors who are willing to carry the cost of moving the whole operation offshore to avoid exchange control and political risks.  Obviously that assumes underlying operations that transcend national borders.”

They are also likely to insist that intellectual property be developed outside South Africa, he says. “IP that is developed locally will be classified as a South African asset, which is a  situation that international investors may not accept,” he says. For this reason, a significant part of key development resources will probably have to be located outside of South Africa.

In summary, says Dommisse, “establishing an international office only makes sense if you’re a genuinely international business. Choose your advisors very carefully, and accept that this is not a low-cost exercise. You will need a tax expert with specific experience in this area, as well as good legal advice. “