Inevitably, given that the new Companies Act provides for the increased accountability of the corporate community, a big portion of it relates to stakeholder rights and remedies.
The ability to hold firms accountable to a wider range of stakeholders is the corollary of the enlightened shareholder value principle, which will, in the long term, determine whether firms do behave as though they are accountable to these stakeholders.
In terms of the new act companies cannot merely focus on making profits. If they make profits at a cost to other stakeholders, for example through the destruction of the environment, they could be in breach of their fiduciary duties and sued personally.
Carl Stein of Bowman Gilfillan says that while he supports the enlightened shareholder value approach adopted in the new act and believes that it has introduced some “excellent innovations”, he is concerned that the rights and remedies introduced will change the way people do business here.
The new act provides considerably more support for stakeholders, including minority shareholders, to take action against directors. In terms of the old act, minority shareholders had few rights or remedies against abusive majority shareholders or an antagonistic board of directors. Stakeholders, who were not shareholders, had very few rights or remedies.
The new act introduces at least six new remedies for stakeholders.
Stein believes that the class action combined with the derivative action will be the most popular, and lethal, of the new remedies. “The class action, which is a legal procedure, not a remedy, has been unequivocally adopted by the act… it permits legal proceedings to be brought by anyone ‘as a member of, or in the interest of, a group or class of affected persons’,” he says.
While the derivative action was provided for in the 1973 act, it was ineffectual because of the costs and the burden of proof on individual shareholders being too heavy.
The new act provides for a procedure that is cheaper and speedier for the complainant – shareholder or stakeholder. “The complainant no longer has to apply to court, all he or she must do is serve a written notice on the company demanding that it institutes legal proceedings against the alleged wrongdoer. Unless the claim is frivolous, vexatious or wholly without merit, the board is then obliged, at the company’s cost, to appoint an independent person or committee to investigate the demand and report back on its likely success,” says Stein.
He believes the new derivative action, combined with the class action, heralds the dawn of more aggressive stakeholder activism in South Africa. – Ann Crotty