When we work on a memorandum of incorporation (“MOI”) or shareholders agreement for a client, depending on the facts of the matter, we often ask whether they or another shareholder wish to have the right to appoint an observer on the board of directors of the relevant company. In brief- an observer is a person who has the right to attend the board meetings of a company but has no legal vote on any board matters.
This right to appoint an observer can be useful in situations where either:
- the shareholder does not hold enough shares to be able to convince the other shareholders that it be allowed to appoint a director (who has a vote); or
- where the shareholder has been given the right to appoint a director, but wants the right to only appoint an observer if it does not feel the need to have an appointed director on the board
A Contractual Position: The right to appoint, remove and replace an observer, and the rights of an observer, are not governed by the Companies Act no. 71 of 2008 (“Companies Act”). It is purely a contractually agreed matter, and so all the detail regarding the observer must be written in to the MOI or shareholders agreement.
An Observer’s Rights: In general, an observer has the right to:
- be notified of all board and board committee meetings;
- attend all board and board committee meetings and be heard at such meetings;
- receive all information furnished to other directors in respect of board and board committee meetings, including board packs and meeting minutes, as well as such other information as the directors may from time to time receive; and
- request information necessary to understand the discussions at any board or board committee meetings;
but has no right to vote, nor to be counted toward any quorum requirements of board meetings. Of course, these rights can be varied depending on what the parties to the agreement decide.
Accessing Information About the Company: For many minority shareholders who cannot negotiate the right to be able to appoint a director that carries a vote, what they miss out on is the access to detailed information about the Company that a director has. Under the Companies Act, shareholders have very limited rights to access information about the company. And even if these rights are expanded in the MOI or Shareholders Agreement, they hardly ever replicate the broad access rights of a director. Being able to appoint an observer to the board will ensure the shareholder gets those much broader access rights.