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What can a director do to reduce personal risk?

- SATIB InsuranceWhat can a director do to reduce personal risk?

Facebook Design for 4th article D&O

Earlier in the D&O series we looked at who is considered a Director and what are some of the behaviors’ expected of Directors in order to reduce their risk.

 

Unless the company’s Memorandum of Incorporation provides otherwise, a company may purchase insurance to protect a Director against any liability or expenses for which the company is permitted to indemnify a director or the company.

 

A company may indemnify a Director in respect of any liability, except for liability arising from situations where the Director:

  • acted in the name of the company, despite knowing that the Director lacked the authority to do so;
  • acted despite knowing that the company was acting in a reckless manner (e.g. incurring liabilities where there was a probability of non- payment);
  • been a party to an act or omission by the company despite knowing that the intention was to defraud a creditor, employee or shareholder of the company;
  • incurred any liability arising from willful misconduct or willful breach of trust;
  • incurred a fine as a result of a conviction or an offense in terms of national legislation.

 

The Companies Act also codifies the business judgment rule. In terms of this rule a Director will not be held liable if he/she took reasonable diligent steps to become informed about the subject matter, does not have a personal financial interest (or declared such a conflicting interest) and has a rational basis to believe that the decision was in the best interest of the company.

 

In discharging any board duty, a Director is entitled to rely on employees of the company, legal counsel, accountants or other professional persons. The Director, however, does not transfer the liability of the director imposed by this act onto such employee.

 

In respect of all duties that may properly be left to some other official, a Director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly. He is entitled to accept and rely on the judgment, information and advice of the management, unless there are proper reasons for querying such. Obviously, a Director exercising reasonable care would not accept information and advice blindly. He would accept it, and he would be entitled to rely on it, but he would give it due consideration and exercise his own judgment in the light thereof.

 

Glossary;

The Memorandum of Incorporation is a document that sets out the rights, duties and responsibilities of shareholders, directors and others within a company