Submission from the Public Investment Corporation Limited to the Department of Trade And

COMPANIES BILL, 2008

SUBMISSION FROM THE PUBLIC INVESTMENT CORPORATION LIMITED TO THE DEPARTMENT OF TRADE AND INDUSTRY

For further information contact:

Winnifred Julie Setshedi

Legal Division: Corporate Lawyer

Public Investment Corporation Limited

1.  Introduction

1.1.  The Public Investment Corporation Limited (“the PIC”) is a wholly owned by the South African Government, with the Minister of Finance as shareholder representative. The PIC was established as a corporation on 1 April 2005 in accordance with the Public Investment Corporation Act, 2004.

1.2.  The PIC is one of the largest investment managers on the African continent, investing funds on behalf of public sector entities, most of which are pension, provident, social security or guardian funds. Its role to invest funds on behalf of these clients, based on investment mandates agreed with each client.

1.3.  In response to Portfolio Committee on Trade and Industry (“the Committee”) invitation for written submissions on Companies Bill, 2008 (“the Bill”), the PIC welcomes the opportunity to offer the following comments on the Bill. The PIC supports the Department of Trade and Industry’s efforts to promote the competitiveness and development of the South African economy.

1.4.  The PIC has reviewed the Bill and to this end our submission aims to offer additional fiduciary principles derived from decisions by foreign courts, that should inform impending legislation on duties of a director, in particular of a nominee director.

2.  Directors’ Duties

2.1.  The PIC notes that section 76 of the Bill introduces a codified common law regime of director’s duties, which includes a fiduciary duty, and a duty of reasonable care. The duties of a director in terms of the common law includes the duty to exercise care, skill and diligence, the duty to act within their powers, duty to exercise independent judgement, duty to act in the best interest of the company, duty to avoid conflict of interest and duty not to accept benefits from third parties.

2.2.  This submission seeks to draw the Committee’s attention to how fiduciary duties principles, in particular, the duty by nominee directors to act in the best interest of the company, have been approached by foreign courts. At issue is whether or not nominee directors should be entitled to have regard to the interests of the nominating company to the extent that those interests or requirements are not incompatible with that director’s duty to act in the best interest of the company.

2.3.  The Bill codifies the common law position that a director of a company has a duty to exercise the powers and perform the functions of director in the best interests of the company. Therefore directors as a general principle owe this duty to the company they serve, to the exclusion of the company’s individual shareholders and all third parties.

2.4.  The current view of South African courts is that in performing their duties, the directors must act in the best interests of the company only. In Fisheries Development Corporation of SA Limited v Jorgen 1980 4 SA 156 (W), the court held that even if a director may be representing the interests of the person who nominated him, in carrying out his duties and functions as a director, he is in law obliged to serve the interests of the company to the exclusion of any such nominating company.

2.5.  In view of the above, a nominee director would be in breach of his fiduciary duties to the company if that director subordinates the interests of the company to that of the nominating company even if such actions are in the interest of the company as a whole and the rights of third parties in relation to the company are not prejudiced.

3.  New Zealand and Australian Case Law

3.1.  However, in other foreign jurisdictions like New Zealand and Australia, the courts are inclining to a more liberal approach in an attempt to bring the doctrine of undivided responsibility by nominee director to a company to harmony with commercial reality.

3.2.  The courts in New Zealand, in the case of Berlei Hestia (NZ) Ltd v Fernyhough [1980] 2 NZLR 150 considered the nature of the directors’ fiduciary duty. In this case, the plaintiffs, nominee directors of the Australian company sought an injunction to prevent other shareholders from excluding them from management of the company on the ground that they were business rivals. The court held that although the shareholders were in competition, there was no evidence that the plaintiffs were under any duty to their nominating company which would be incompatible with discharge of their duties to the company.

3.3.  The court adopted an adjusted form of fiduciary on the basis that when articles are agreed upon whereby a specified shareholder or group of shareholders is empowered to nominate its own directors, then there may be grounds for saying that in addition to the responsibility which such directors have to all shareholders, they may have a special responsibility towards those who nominated them.

3.4.  Such a view proceeds on the basis that the articles were so construed with the intent and belief that the institution of such a special responsibility towards one class of shareholders was conducive to the interests of the company, limited to circumstances where the rights of third parties of third parties vis-à-vis the company will not be prejudiced.

3.5.  In another New Zealand case, Trounce and Wakefield v NCG Kaiapoi Ltd (1985) 2 NZCLC 422, the critical issue was whether the majority directors were entitled to deprive nominee directors their rights to participate in the affairs of the company. A company, Stevens, was a 20% shareholder in Kaiapoi, under the articles of which it was entitled to appoint two directors. Another company in the Stevens group made a takeover bid for Kaiapoi.

3.6.  The judge in this case found that it could not be assumed, simply because the directors were appointees of Stevens that they would act in the interest of the Stevens’s group rather than interests of the company as a whole. Since the articles gave Stevens the right to appoint to appoint two directors, it must have been contemplated that those directors would participate in all matters relating to the future of the company. The court went further to state that even if a situation arose where a matter before the board (for example, the introduction of a new shareholder), it should not be anticipated that the information regarding that matter would be used by the nominee directors in breach of fiduciary duty.

3.7.  The courts in Australia, in a case of Levin v Clark [1972] NSWR 686 went further stating that it may be in the interests of the company that there be upon its board of directors a director who will represent interests of nominating company and acting solely in the interests of such a company and a director acting in the interests of the company as a whole. Therefore the board would consist of different directors representing different interests.

3.8.  In this case, the articles, coupled with the sale and mortgage arrangements lessened the fiduciary duties of the nominee directors to the company. The articles permitted nominee directors to act primarily in the interest of the mortgagee upon default by the mortgagor. It was found that where articles allows, a nominee director was entitled to act in the nominating company’s interests than that of the company.

3.9.  In order to avoid actual or possible conflict between duty and duty, the solution is to include a provision in the articles of association of the company by unanimous agreement of shareholders providing that a director, in certain circumstances, may prefer his duty to the nominating company over that of the company. It is argued that where this occurs, there is no weakening of the fiduciary principle, but rather a confirmation that the content of the duty may be affected by the consensual circumstances in which it arises.

4.  PIC Position

4.1.  The PIC invests in a variety of companies and/or makes finance to companies or their shareholders (“Investee Companies”). In order to protect public investments in Investee Companies, the PIC nominates or appoints directors to the boards of these companies to represent its interests. It is in this context that the PIC supports the view that proposed company legislation adopts a liberal attitude, as demonstrated above.

4.2.  The cases have established one principle clearly on nominee directors, that is not to be assumed that directors will follow the interests of the company which appointed them, but subject to the qualification that they will not act so if their acts would not be in the best interest of the company as a whole. Nominee directors are therefore to be absolved from suggested breach of duty to the company where they act in furtherance of their nominating companies, provided that their conduct accords with bona fide belief that the interest of the company are likewise being advanced.

4.3.  We request the Committee to consider principles established in these cases so as to inform impending legislation.