Directors beware! The court declares Dudu Myeni (former SAA Chair) a delinquent director July 2020

By REFENTSE CHUENE, ZAINOBIA DEMARTHE AND STIMELA MOKOENA, Published in Company Law

It is a common principle in South African company law that a company is managed by its board of directors. The Board bears the responsibility for the functioning and management of the company and is ultimately accountable for its performance. However, the Board's collective responsibility does not exclude the individual responsibility and liability of each of the directors. Where the company performs poorly due to the dishonesty, recklessness or gross negligence of the Board, individual directors may be held jointly and severally liable for breaching their fiduciary duties as contemplated in the Companies Act, 2008, and for those individuals who are directors of State Owned Entities (SOEs), the Public Finance Management Act, 1999 (PFMA).

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Judgment overview

These principles were considered in the recent judgment of the High Court of South Africa (Gauteng Division, Pretoria) in the case of Organisation Undoing Tax Abuse and Another v Myeni and Others (15996/2017) [2020] ZAGPPHC 169, wherein the Organisation Undoing Tax Abuse (OUTA) and the South African Airways Pilot Association (SAAPA) (collectively referred to as the "Plaintiffs") sought an order against Ms. Dudu Myeni to declare her a delinquent director in terms of s162(5) of the Companies Act.

During September 2009, Myeni was appointed as a non-executive director of South African Airways (SAA). She was appointed as acting chairperson of the Board during December 2012, and as the chairperson in January 2015. She was re-appointed as chairperson in September 2016 and served as such until November 2017.

The Plaintiffs submitted that Myeni's alleged conduct and failures during her tenure as a director and chairperson of the Board of SAA constituted wilful and grossly negligent breaches of her fiduciary duties in terms of s76, read with s162(5)(c) of the Companies Act, as well as sections 50, 51 and 55 of the PFMA. The case centred on two transactions where Myeni allegedly breached her fiduciary duties, namely the "Emirates Deal" and the "Airbus Swap Transaction".

The Emirates Deal was a proposal for an enhanced code-sharing agreement between SAA and Emirates. It offered a range of benefits for SAA, including an annual minimum revenue guarantee of approximately USD100 million. The Plaintiffs alleged that Myeni, through various acts and omissions, frustrated the implementation of, and took steps to ensure that the Emirates Deal (which had substantial economic benefits for SAA) fell through.

The Airbus Swap Transaction, on the other hand, involved a 2015 agreement between SAA and Airbus to cancel a contract for the purchase of ten Airbus A320-200's and to substitute it with a new deal in which SAA would lease five Airbus A330-300 aircrafts directly from Airbus. This deal would allow SAA to escape an onerous contract with Airbus for outstanding pre-delivery payments (PDPs) amounting to over R1 billion for the ten aircraft. In addition, SAA would have received funds on the PDPs that had already been paid, which were estimated to have a positive cash flow of US$106 million over three years. The Plaintiffs alleged that although the transaction was eventually concluded, Myeni's conduct leading up to the implementation of the transaction fell short of the conduct expected of a director and chairperson of the Board of SAA.

Directors' duties in terms of the Companies Act

As already stated, directors owe certain duties to the company. These duties are contemplated in s76(2) and (3) of the Companies Act. Section 76(2)(a) states that a director must not use her position, or any information obtained while acting in the capacity of a director: (i) to gain an advantage for herself, or for any person other than the company, or a wholly-owned subsidiary of the company or (ii) to knowingly cause harm to the company or a subsidiary of the company. Furthermore, s76(3) states that a director, when acting in that capacity, must exercise her powers and perform her 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:
    • carrying out the same functions in relation to the company as those earned out by that director; and
    • having the general knowledge, skill and experience of that director.

Where a director is in breach of their fiduciary duties, or there is serious misconduct by a director, an interested party (shareholder, director, company secretary or trade union) may apply to court for an order declaring a director delinquent. In terms of s162(5)(c) of the Companies Act, a court must make such an order if the person, while a director:

  • grossly abused the position of director;
  • intentionally, or by gross negligence, inflicted harm upon the company, contrary to section 76(2)(a); or
  • acted in a manner that amounted to gross negligence, wilful misconduct or breach of trust in relation to the performance of the director's functions within, and duties to, the company.

A declaration of delinquency under these circumstances means that a person is automatically disqualified to act as a director for a minimum of seven years, subject to the court's power to relax the order after three years and to place the director on probation. Where the grounds for delinquency have been established, the Supreme Court of Appeal in Gihwala v Graney Property Ltd 2017 (2) SA 337 (SCA) held that a court "must" grant this order – it has no discretion in this regard. Furthermore, the order has the effect that a director will need to resign from all boards and co-operate with any processes to remove them as a director.

In terms of s66 of the Companies Act, the Board has collective and ultimate responsibility for the management of the company. This means that each director has a duty to ensure the proper management of the company. However, this collective responsibility does not absolve directors of their individual liability. Each of them must comply with their fiduciary duties under s76, otherwise they may be held jointly and severally liable for the misconduct.

The reason Myeni was the subject of this case, and not the entire SAA Board, was decided by the court in an earlier application ( Myeni v Organisation Undoing Tax Abuse NPC & Others (15996/2017) [2019] SAGPPHC 565) wherein Myeni attempted to join other members of the Board to the case. The court held that the relief claimed did not impact the other directors and, as a result, they did not have a direct and substantial interest in this matter. The other directors may still be brought to court by any other interested party on a similar set of facts. In any event, a plaintiff is entitled to choose their defendant from a group of wrongdoers.

In terms of the King III Report on Corporate Governance (King III), the primary role of a chairperson of a Board is to provide leadership to the Board, set the ethical tone for its performance and undertake the management thereof. The chair ensures that focus is maintained by the Board on what is best for the organisation and that the Board conducts itself in a way that cultivates and exhibits the characteristics of integrity, competence, responsibility, accountability, fairness and transparency.

The Court found that Myeni, as the chairperson of the Board, did not exercise the ethical and effective leadership required by the Companies Act, King III or the PFMA. Myeni, in her testimony, submitted that the Emirates Memorandum of Understanding (MOU) was a "sham" and was "unlawful", as it was allegedly an impermissible attempt to secure Emirates a fourth flight frequency to Johannesburg. She also claimed that the MOU contained no material benefits for SAA, and that the Board had opposed the MOU because of these concerns. The court found that her testimony was contradictory and untrue as the evidence revealed that the Board approved the conclusion of the MOU in the July 2015 meeting.

Myeni also contended that she could not approve the signing of the non-binding MOU because a board resolution was required. No Board resolution was in fact required for the signing of the MOU. The MOU merely paved the way for further negotiations, and the agreement would only then require a board resolution. Myeni did not have any reasonable grounds to block the signing of the MOU. Not only was she found to have deliberately, or through gross negligence, inflicted substantial harm on SAA, but her attempts to justify her conduct showed that she acted dishonestly, in bad faith and not in the best interests of SAA. This led to the inevitable conclusion that Myeni breached her fiduciary duty to act in good faith, for a proper purpose, and in the best interest of SAA in terms of s76(3) of the Companies Act.

Directors' duties in terms of the PFMA

The fiduciary duties entrenched in the Companies Act overlap those in the PFMA with regard to major public entities. SAA is listed as a major public entity in terms of Schedule 2 to the PFMA, and its Board is the designated "accounting authority" in terms of s49(2)(a). The Plaintiffs submitted that Myeni's alleged failures and conduct constituted wilful and grossly negligent breaches of her duties in terms of sections 50, 51 and 55 of the PFMA.

All members of an accounting authority are subject to heightened fiduciary duties, when compared with those entrenched in the Companies Act. Section 50 of the PFMA states that the directors must, among other things: (i) act with fidelity, honesty, integrity and in the best interests of the public entity, (ii) disclose to the Minister of Finance all material facts, including those reasonably discoverable, which in any way may influence the decisions or actions of the Minister, and (iii) prevent any prejudice to the financial interests of the state. Section 51 sets out further responsibilities of the accounting authority, specifically that it must submit all reports, returns, notices and other information to parliament as required by the PFMA. Section 55 also places more stringent financial reporting duties on the accounting authority in relation to the submission of: (i) financial statements to the auditors, (ii) the annual report of that public entity's activities during that financial year, and (iii) the auditors' report to the relevant minister for tabling in parliament.

One of the conditions for the conclusion of the Swap Transaction was the approval of an application to the Minister of Finance in terms of s54(2) of the PFMA (Section 54 Application). The first Section 54 Application was approved by the Minister in September 2015, whereafter the only outstanding task was for the Board to ratify the signatories as the Board had prematurely approved the transaction and signed the agreements.

Despite the urgency, rather than ratifying the signatories, Myeni and two other non-executive directors engaged with Airbus directly to renegotiate the deal without the knowledge of the other Board members. Myeni received multiple letters from Airbus during September and October 2015, rejecting her proposals to renegotiate the transaction and stating that if the transaction was not concluded, the PDPs would become payable. The Minister expressed his frustration with the Board regarding the delays, and informed Myeni that her new proposals would constitute a significant amendment and would thus require another s54 Application. During November 2015, Myeni submitted new s54 Applications, which were rejected by Minister Nene and by Minister Gordhan on separate occasions. Minister Gordhan, as encouraged by Airbus, directed the Board to conclude the transaction by 21 December 2015. By that date, Myeni had made no effort to convene any Board meeting, and Airbus wrote to Myeni stating that the Board had to confirm the approval by close of business. Fortunately, National Treasury became aware of this communication. After they called Airbus directly, they managed to secure the necessary ratification by 22 December 2015.

The court found that there was a long list of falsehoods, misrepresentations and omissions of material facts by Myeni in her applications. Not only was she untruthful, but the applications also failed to disclose material facts that were directly relevant to the Minister's decision; this being in direct breach of her fiduciary duties under s50(1)(b) and (c) of the PFMA. Her failure to ensure that the applications contained all relevant information was found to be grossly negligent.

By delaying the conclusion of the Swap Transaction, the court found that Myeni wilfully and recklessly contributed to SAA breaching its financial reporting obligations under sections 51 and 55 of the PFMA. In terms of s55, the Board had a duty to prepare and submit SAA's financial statements to the auditors on 31 May 2015. SAA then had until 31 August 2015 to submit its annual report and audited financial statements, together with the auditors' report, to National Treasury. In terms of s65(2) of the PFMA, the Minister was required to table SAA's financial statements in parliament by 30 September 2015. In a letter from the Minister, dated 14 September 2015, the Minister stated that the conclusion of the Swap Transaction was a pre-requisite for SAA to be granted a R5 billion government guarantee that would ensure that the company's 2014/2015 annual financial statements could be prepared on a going concern basis, as opposed to an insolvent basis. Despite Myeni being made aware of this fact, she took no steps to ensure that the Board ratified the signatories and concluded the transaction. In fact, she did the opposite by attempting to renegotiate the existing Swap Transaction with Airbus. Her attempts to renegotiate the transaction, after it had been carefully negotiated, were an indication of an intentional or grossly negligent breach of her fiduciary duties in terms of s76(3) of the Companies Act. The court found that Myeni failed to take expeditious steps to conclude the Swap Transaction, and that this conduct was a breach of her duties under s55 of the PFMA.

Furthermore, it should be noted that s86(2) of the PFMA states that the board/a director is guilty of an offence and liable, on conviction, to a fine or imprisonment of up to five years, if that board/director wilfully or in a grossly negligent way fails to comply with a provision of section 50, 51 or 55 of the PFMA. Because the court found Myeni to have breached these sections, there is a possibility that she could be criminally prosecuted by the National Prosecuting Authority.

King Report

Although King III, the predecessor to King IV, was relevant to the case, being the code of good corporate governance in force during the tenure of Myeni, we believe that this article would not be complete without a brief assessment of the relevant practices in King IV, which contains principles similar to those in King III.

The governing body (or Board) has the power to determine if and when to delegate particular roles and responsibilities to committees. Except to the extent that the Memorandum of Incorporation provides otherwise, the Board may delegate any authority to any committee. Any delegation by the Board to a committee or a member of the Board will not, by or of itself, constitute a discharge of the Board's accountability. The Board should apply its collective mind to the information, opinions, recommendations, reports and statements presented by the committee or the member (recommended practice 49). The same is required of the individual members in the performance of their duties and functions.

The court found Myeni to be "dishonest, reckless and grossly negligent" with regard to the Emirates Deal and the Swap Transaction. Although she created a committee to advise SAA on the Emirates Deal, which may have steered her away from the deals, she still acted on a frolic of her own, and King IV reiterates that committees do not absolve directors of their individual duties towards the company.

In conclusion, Myeni's actions and failures showed that she acted dishonestly, in bad faith and that she deliberately or through gross negligence inflicted substantial harm on SAA. She was not found to have acted as a reasonable director would. Her actions demonstrated delinquent conduct in terms of s162(5)(c) of the Companies Act, and the Court made an order declaring Myeni to be a delinquent director in terms of s165(5), which is to subsist for the remainder of her lifetime, subject to s162(11) and (12). Myeni has, however, indicated that she will be appealing the judgment, and we will publish an update as soon as there is any progress regarding the appeal (if any).

The case is important as it, reminds directors that:

  1. The Board bears the full responsibility for the functioning and management of the company and is ultimately accountable for the performance thereof. That being said, non-executive members of the Board should not dictate the day-to-day management of the company; this is the responsibility of the executive. However, the fact that a director is a non-executive does not absolve them of any of their fiduciary duties in terms of the Companies Act.
  2. Although the board may delegate its authority to a committee, the board should still apply its collective mind to the information, opinions, recommendations, reports and statements presented by the committee. The delegation to a committee does not absolve directors of their fiduciary duties.
  3. In terms of the "business judgment rule", a director could be protected from an allegation of a breach of her duties where that director: (i) took reasonably diligent steps to become informed about the matter,(ii) had no conflict of interest in relation to the matter and (iii) had a rational basis for believing, and did believe, that her decision was in the best interest of the company.
  4. Directors may be held jointly and severally liable for actions taken by a collective. Therefore directors must always ensure that they are acting in the best interests of the company and are complying with their fiduciary duties in terms of the Companies Act and the PFMA, where applicable.
  5. With regard to SOEs, directors must keep in mind that the duties described in the PFMA do not exclude the provisions of the Companies Act, but should rather be seen as supplementing the overarching provisions of the Companies Act.
  6. Once a court has found that the grounds for a delinquency order have been established, the court has no discretion in this regard and "must" declare the director delinquent. A declaration of delinquency can subsist for a minimum of seven years and a maximum of the lifetime of the director, subject to the courts power to relax the order after three years.
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Demarthe and Mokoena are Partners, and Chuene an Associate with Fasken (South Africa).