In the corporate world, the way transactions are authorised is not mere red tape; it is the cornerstone of accountability, transparency, and compliance. Yet, in South Africa, many boards and shareholders treat it as an afterthought. The consequences of getting it wrong can be devastating, including invalidating transactions, personal liability for directors, and crippling shareholder disputes.
Corporate law experts at Cox Yeats caution that the failure to follow proper authorisation processes is one of the most common and costly mistakes a company can make. The firm’s recent podcast discussion on this subject highlights the importance of understanding the Companies Act and the governance framework that underpins company decision-making.
Who holds the power to decide?
Decision-making authority rests primarily with the board of directors, often described as the 'controlling mind' of the company. Legally, directors are responsible for steering the business. However, companies are layered structures, and some decisions require more than approval at board level.
To ensure efficiency, directors often delegate authority to committees, executives, and managers for routine matters, while retaining oversight of high-level issues such as acquisitions, mergers, financings, or disposals of major assets.
Formality, however, is non-negotiable. All significant decisions must be recorded through resolutions, either passed at board meetings or through a written resolution. While a majority approval typically suffices, the company’s Memorandum of Incorporation (MOI) or shareholders’ agreement may require stricter thresholds. In other words, the Companies Act provides the baseline, but the MOI and shareholder agreements can raise the bar significantly.
When shareholders must be involved
Not all decisions rest solely with directors. The Companies Act requires shareholder approval in specific circumstances where the potential impact is substantial. Examples include:
- Financial assistance (sections 44 and 45): where a company lends money, provides guarantees, or otherwise supports a related party or a person acquiring its shares.
- Disposals of the greater part of assets or undertakings (sections 112 and 115): for instance, selling a major division or portfolio.
- Share buybacks (section 48): when the company purchases its own shares.
These matters generally require a special resolution, which means approval from 75% of the voting rights exercised by shareholders at a quorate meeting. Additionally, shareholder agreements may provide for reserved matters or even unanimous consent, raising the threshold higher than the statutory default.
The Constantia Case: Narrowing financial assistance
One of the most debated areas of company law in South Africa is financial assistance. Historically, the definition was applied broadly, creating a conservative approach in which even loosely related arrangements were treated as requiring compliance.
The Supreme Court of Appeal in Constantia Insurance Company Limited v Master of the High Court and Others 2023 (5) SA 88 (SCA) clarified what constitutes financial assistance. The Supreme Court of Appeal held:
“When used in a definition, the word ‘includes’ generally denotes a term of extension. That would be the case where the primary meaning of the term that is defined is well-known and the word ‘includes’ introduces a meaning or meanings that go beyond that primary meaning. In such a case, the definition would encompass the primary well-known meaning as well as that which the definition declares that it should include. See Land and Agricultural Bank of South Africa v The Minister of Rural Development and Land Reform and Others [2022] ZASCA 133 para 26 and authorities cited there.
"This does not appear to be applicable to s 45(1). All the matters included by s 45(1)(a) (and excluded by s 45(1)(b)), fall within the primary meaning of financial assistance. In R v Debele 1956 (4) SA 570 (A) at 575H-576A, Fagan JA referred to a situation where all the matters listed as included in the definition fell within the primary meaning of the defined term. He said that indicated an intention to determine the ambit of the term with certainty and that the listed matters were exhaustive of the term. See also Stauffer Chemical Co and Another v Safsan Marketing and Distribution Co (Pty) Ltd and Others 1987 (2) SA 331 (A) at 350J-351A.
"As I have said, this applies to s 45(1)(a). In my view, the intention to provide a precise definition is even clearer where, as in this case, the excluded matters would also fall within the primary meaning of the term. I therefore conclude that the matters mentioned in s 45(1)(a) are exhaustive of the meaning of ‘financial assistance’ and disagree with the high court’s contrary finding.”
The effect of Constantia is that three forms of financial assistance listed in the definition of financial assistance represent a closed list, and if a transaction does not fall squarely within one of the three categories of 'financial assistance' or does not constitute 'indirect financial assistance' then section 45 does not apply to the transaction.
While the decision in Constantia, and its effect, may have been received as somewhat of a surprise, it is now the law – until the Supreme Court of Appeal or the Constitutional Court decides otherwise. The reasoning in Constantia is also consistent with the manner in which Courts have interpreted ‘includes’.
The solvency and liquidity test
Even when shareholder approval is secured, directors face an additional hurdle: the solvency and liquidity test.
This test requires boards to assess if the assets of the company exceed its liabilities and, over a 12-month horizon, if the company will be able to meet its debts as they fall due. The exercise demands robust financial forecasting and a willingness to challenge assumptions.
The rationale is to protect creditors and shareholders from a company that attempts to distribute funds or extend financial assistance it cannot afford. Failure to apply the test properly can invalidate a transaction and expose directors to liability.
The consequences of non-compliance
The risks of ignoring authorisation rules extend beyond technical irregularities.
- Transactions can be void. Deals that are not authorised correctly may have no legal effect, potentially leaving parties without recourse.
- Directors may face personal liability. Those who knowingly approve unlawful transactions can be held accountable for resulting losses.
- Disputes escalate. Shareholders, creditors, and regulators may intervene, creating delays and uncertainty.
Benjamin Meadows explained in the firm’s recent vodcast: “People often assume that decision-making in companies can be informal. Sometimes it can, but often it can’t. If you don’t get it right, the deal you were trying to implement may simply never happen.”
Why it matters now
South African companies are operating in a volatile economy marked by uncertainty, restructuring, and the search for new financing models. The urgency to act quickly is understandable. But rushing deals without following authorisation procedures can undo months of work and result in significant financial and reputational damage.
Strong governance is not only a legal requirement but also a commercial safeguard. It protects the integrity of transactions, shields directors from liability, and reassures shareholders and creditors that the business is being managed responsibly.
Practical guidance for directors and shareholders
The team recommends the following steps for boards and shareholders:
- Understand the rules. Always check the Companies Act, the MOI, and shareholder agreements before authorising significant transactions.
- Document decisions properly. Ensure resolutions are drafted and recorded in line with the law.
- Involve shareholders when required. Err on the side of caution with financial assistance, disposals, and buybacks.
- Apply the solvency and liquidity test rigorously. Avoid relying on overly optimistic projections.
- Seek professional advice. Early input from lawyers and financial advisers can prevent costly disputes later.
Authorising transactions is far more than a procedural step. It ensures that a company’s most important decisions are made lawfully, transparently, and with accountability to all stakeholders. In an era where governance failures can topple companies, directors and shareholders cannot afford to take shortcuts.
The Cox Yeats Podcast explores these issues in greater depth, using practical examples and highlighting recent case law to illustrate the real-world consequences of poor authorisation.
Watch the full discussion here:
