Conflicts of Interest & the Companies Act

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The Companies Act 71 of 2008 (the Act) obliges a director of a company to disclose personal financial interests in advance, by delivering to the board notice of such personal financial interest (or to the shareholders in the case of a company where there is only one director who does not hold all of the beneficial interests of all of the issued securities of the company).

In respect of the latter scenario the personal financial interests which may form the subject matter of an agreement, is to be approved by an ordinary resolution of the shareholders, after the director has disclosed the nature and extent of the interest to the shareholders.

Except for the circumstance referred to as aforesaid (i.e. where there is one director of a company) a director- 

  • must disclose the interest and its general nature before the matter is considered at a meeting of the board;
  • must disclose any material information relating to the matter and known to the director;
  • may disclose any observations or pertinent insight relating to the matter if requested to do so by the other directors;
  • if present at the meeting, must leave the meeting immediately after making the disclosure;
  • must not take part in the consideration of the matter except to the extent of making the disclosure.

The decision, transaction or agreement approved by the board (or by a company with one director who does not hold all of the beneficial interests of all of the issued securities of the company) is valid only if:

  • it was approved following disclosure of that interest in the manner contemplated in section 75 of the Act;
  • or despite having been approved without disclosure it has been ratified by an ordinary resolution of the shareholders following disclosure of the interest;
  • it has been declared to be valid by order of Court in terms of section 75 of the Act.

According to Corporate Governance-An Essential Guide for South African Companies (3rd edition (Author: R Naidoo) (Publishers: Lexus nexus) a conflict of interest must generally be a financial or other relationship interest which could directly influence the director’s behaviour. Further it is good governance practice for companies to have rigorous policies in place for identifying and managing conflicts of interest. The contents of such policies would be determined by “Business model, size, structure, geographical spread and the nature of its business activities.”

Although not a requirement in terms of the Act, King IV recommends the annual renewal of declarations of interest by directors.

Liability

The failure to make the necessary disclosure of personal financial interest (or a later ratification of the agreement or declaration of validity by the courts) will result in any profits received by the director being recoverable by the Company.

According to Henochberg on the Companies Act (Publishers: Lexis Nexis) a director may incur criminal liability for failure to disclose the personal financial interest. Criminal liability would be incurred in that “when company directors deliberately withhold information material to the affairs of their company from the Board of Directors, there is, in the absence of an explanation for such conduct which may reasonably be true, an a priori case of fraudulent non-disclosure”
Further notwithstanding ratification of a contract by the shareholders in terms of section 75 (7)(b) of the Act, a director may still be held liable for breach of fiduciary duties.

For further advice & guidance on the issue of conflict of interests contact Lisa Boogaard of Boogaard Attorneys on 0721164121.