The appropriate management of directors' conflicts of interests is a critical corporate governance issue and is much more widely and strictly regulated under section 75 of the new Companies Act, no. 71 of 2008 (the "Companies Act"). This is one of the most important changes in the new Companies Act and should be appropriately managed because of the material divergence from prior practice and the serious consequences of non-compliance. Importantly, we are of the view that these provisions were immediately effective from 1 May 2011 notwithstanding any provision to the contrary in a pre-existing company's constitution.
The more material key changes are:
- First, the provisions regulating directors' duties are unalterable and apply notwithstanding any provision to the contrary in a company's Memorandum of Incorporation. Therefore, the prior common practice of providing in a company's articles of association that, after disclosure, directors can vote on all conflicted matters, is no longer valid.
- Second, the duties in respect of conflicts of interests apply not only to directors and alternative directors, but also prescribed officers and committee members. A prescribed officer is defined as a person who, despite not being a director, exercises general executive control and management over the whole, or a significant portion, of the business or activities of the relevant company, or who regularly participated to a material degree in such management and control. While we shall, for ease of reference, continue to refer to directors in respect of the duties, such references should be read as including all these relevant persons.
- Third, the duty (including the prohibition against voting) is expanded to apply not only where a director has an interest in a matter, but also where a director knows (after enquiry) that a related person has an interest in a matter. As a result, the enquiry requires consideration of the interests of a wide range of persons and entities related to directors, including other companies in respect of which the relevant persons are also directors.
Essentially the provisions provide that, if a director of a company has a personal financial interest in respect of a matter to be considered at a meeting of the board, or knows that a related person has a personal financial interest in the matter, the director must, amongst other things, disclose the interest and its general nature before the matter is considered at the meeting and, if present at the meeting, must leave the meeting immediately after making the required disclosures and may not vote.
As a result of the inclusion of 'related persons' the provisions are wider than first meets the eye and are particularly relevant to inter-group transactions. In regard to natural persons, a natural person is related to their close family (two degrees of consanguinity or affinity) and to controlled juristic persons. In regard to juristic persons, they are related to one another if the one, directly or indirectly, controls the other person or if they are both under "common control" (e.g. all companies in a group of companies with a common holding company are related to one another and to any natural person that controls the holding company). In this context it should be borne in mind that 'control' is very widely defined. Further, in the context of conflicts of interests, the definition of a 'related person' is extended to include a second company of which the director or a related person is also a director, or a close corporation of which the director or a related person is a member. As a result, one has to be alive to such 'common directorships', particularly in relation to inter-group transactions.
It is also important to note that the obligations are ongoing and not limited to board meetings. Directors must not only disclose personal financial interests in respect of matters to be considered at a meeting of the board, but also at any other time when a director acquires a personal financial interest in an agreement or matter in which the company has a material interest or knows that a related person has acquired a personal financial interest in the matter, after the approval of the agreement or matter by the company.
There are a few limited exclusions to the conflict of interest provisions and a company should take appropriate steps to ensure compliance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.