It is well known that one of the fundamental duties of a director is not to allow any personal financial interests to interfere with his or her corporate responsibilities. Hence the statutory duty to make disclosure of such interests to the board of directors. It is important to note, however, that this duty is no longer confined to directors but has now, by virtue of the new Companies Act (71 of 20008), been imposed on a broad spectrum of company officers.
The duty to disclose personal financial interests which conflict with the interests of the company has been codified in section 75 of the new Act. This section is much broader than the corresponding section of the previous Act (61 of 1973), in that it expressly records that a "director" includes, among others, an alternate director, a prescribed officer or a person who is a member of the audit committee, regardless of whether that person is a board member. 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 company or who regularly participates to a material degree in such management and control.
It follows that companies will need to spend some time identifying who, within their organisation, potentially falls within this definition because all such personnel will be required to disclose any "personal financial interest" that they may have which conflict with the interests of the company. This refers to a direct material interest of that person of a financial, monetary or economic nature. Unlike the previous Act, it is not necessary that the interest in question be of significance to the company's business.
Where a director, in the broader sense as set out above, has a personal financial interest in a matter to be considered at a board meeting, that director is obliged, before the matter is so considered, to disclose the interest and its general nature together with any material information relating to the matter to the board. If that director is present at the relevant meeting, he or she must leave the meeting immediately after making the disclosures and must not take part in consideration of the matter.
Despite a director being required to recuse him or herself in this situation, such director would nevertheless be regarded as being present for the purposes of constituting a quorum. Such a director would not, however, be regarded as being present for the purposes of determining whether a resolution has sufficient support to be adopted.
The rules as set out above apply also in the case where a director knows that a related person1 has a financial interest in a matter to be considered at a board meeting.
Where an agreement or other matter has already been approved by a company, in which a director subsequently acquires a personal interest, the director must promptly disclose to the board the nature and extent of that interest and the material circumstances relating to how it was acquired. Such disclosure is also required where a director knows that such an interest has been acquired by a related person.
A decision by the board, or a transaction or agreement approved by the board is valid despite any personal financial interest of a director or person related to the director if such interest was either approved or ratified by an ordinary shareholders resolution. Also, a transaction or agreement approved by the board or shareholders, as the case may be, may be declared valid by a court on application by any interested person.
There are certain exclusions when it comes to the duty to disclose a personal financial interest. The duty does not apply, for example, to a director in regard to a decision that may generally affect all of the directors of the company in their capacity as directors. It also does not apply to a director in respect of a proposal to remove a director from office or to a director who is the only director and holds all of the issued securities in the company.
Failure to make the necessary disclosure exposes directors to liability under the common law for loss, damages or costs sustained by the company as a consequence of such failure. It is important to bear in mind that it is not possible to relieve a director of the duty to disclose personal financial interests. Any agreement, provision in the company's Memorandum of Incorporation or rules or resolution which purports to do so shall be void.
Directors, alternate directors, prescribed officers, members of a committee of a board and members of the audit committee therefore need to be fully aware of their obligations under section 75 and its broad scope. If at all in doubt, they should make full, frank and detailed disclosure in order to avoid any subsequent allegation that the board was not fully informed of the personal financial interest in question.
1. This is a defined term in the new Act and includes persons related to the director and companies which he/she controls.
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.