Agreed to be on the board of your friend’s startup? Here’s what you need to know

A friend or acquaintance approaches you to be ‘on the board’ of his or her new company, to give input or guidance. You happily sign on the small-print free dotted line, pleased to help out and perhaps you’re being paid for your time too, and you may also gain some valuable experience along the way. But remember that accepting appointment as a director or a company should not be done lightly.

A web of legal duties exist which by law a director owes to the company, and it is a very good idea to be aware of these and take them into account before saying yes. Your attorney will be able to advise you of your obligations and the most important provisions which you need to consider.

Amongst other applicable law, the common law plays an important part in the governance of a director’s duties and responsibilities. The Companies Act of 2008, The Value-Added Tax Act of 1991 (VAT Act), National Environmental Management Act, and other statutes relating to taxation, labour relations, industrial relations and competition law also provide for increased levels of responsibility and potential liability.

A director’s duties under the common law are the obligations owed by the director to the company he or she deserves. The director is considered a fiduciary, which means that the manner in which he or she acts must protect the company’s interests. There are categories into which these duties may be divided, and they are: to act in the best interests of the company, to act within the relevant powers and for a proper purpose, to exercise care, skill and diligence, to exercise independent judgement, to avoid conflicts of interest, and to abide by the corporate opportunity and no-profit rules. A full explanation of these duties is beyond the scope of this article, but it can be seen that the extent to which the law provides is wide and onerous.

In certain circumstances, for example in accordance with the principles of common law relating to a breach of the fiduciary duty, the Companies Act of 2008 provides for a director to be rendered personally liable for losses sustained by the company, so this is a red flag for any person who is being asked simply to be a name on a list of directors.

However, a director can get from the company a written indemnification for certain of the legal consequences of an unlawful act or omission (other than lack of authority, and reckless or fraudulent trading) and this can take the form of a written document. A company can only provide this indemnification if its memorandum of incorporation does not prohibit this from being done, so be aware of this and make sure that this is in fact possible in a particular circumstance. Insurance too can be taken out by the company at its cost, against most contingencies, even if the director him or herself will receive the proceeds of the policy.

Your attorney will be able to assist you in drawing up such a document to protect you if you require this as a director.

**Please note that these comments are summarised, may not be applicable to your particular situation and do not constitute legal advice. Please consult your legal professional should you wish to obtain a formal legal opinion.**