A director, shareholder and employee? What rules apply to each position?

“I’m a director in a local design company. I’m also a shareholder in the company and have an employment contract. Lately, I’ve been at loggerheads with my co-directors about the direction of the business. I just feel we want different things. I’ve now decided to rather head out on my own and start my own design company. But I want to make sure I can do this?”

Firstly it must be understood that although the positions of director, shareholder and employee can all reside in one person, these positions are not all the same and have different legal responsibilities potentially linked to them.

A director of a company is entrusted by the shareholders of the company with the responsibility for the functioning and management of the company. The Companies Act 71 of 2008 (“Companies Act”) extends to directors the authority to perform all the functions and exercise all the powers of the company. The Companies Act also sets out the minimum standard of conduct required by directors and provides for liability where a director falls short of this standard.

A shareholder of a company is the holder of shares issued by the company and ultimate control of a company rests with the shareholders, as the owners of the company. While the directors of a company may direct and manage the affairs of the company, the shareholders are empowered in terms of the Companies Act to participate in the appointment and removal of directors from office.

An employee has an employment relationship with the company and is subject to a contract of employment with the company which sets out the nature and scope of the employee’s relationship with the business during and possibly even after employment. Executive and senior employees, such as directors, may also be employees of a company and have contracts of employment with the company.

A director occupies a position of trust within the company and must act as caretakers of their companies, manage these entities and act as their agents. Once a person accepts appointment as a director, he or she becomes a fiduciary (being a person who holds a legal or ethical relationship of trust) in relation to the company and is obliged to display the utmost good faith towards the company in his or her dealings on behalf of the company.

Directors and senior employees of a company may not compete with the business of the company, while such a person is a director or employee of the business. This position can change when such a person leaves their position as employee and director.

Directors owe a duty to the company, even after they leave their position as a director, and may not disclose or divulge any secret or confidential information of the company to third parties, that he or she gained in his or her position as a director.

Employees must consider the provisions of their employment agreement and take note of any confidentiality, non-compete or restraint of trade clauses that may impede their ability to engage in commercial or employment activities after they leave the employment of the company.
Similarly, when such a person exits the company as a shareholder, regard should be had to the provisions of any shareholders agreement that was concluded between the shareholders of the company to govern their relationship, since such agreement may also contain confidentiality, non-compete and restraint of trade clauses.

Therefore, while generally one is free to use their skills, experience and expertise gained at a company in the open market, you may be prevented from (at the very least) sharing any secret or confidential information of the company gained during your involvement with the company with third parties, or using such information or knowledge to compete with the business of the company. This position can become even more complicated if there are restrictive conditions in your employement contract or shareholders agreement. 

To help you establish clearly what restrictions exist to you establishing a new company, it would be advisable to consult with your attorney to review any contractual and fiduciary restrictions that may exist before you proceed to establish your new business.

May 13, 2019

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