Most Read Contributor in South Africa, September 2016
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conflicted matters, is no longer valid.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
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
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
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
There are a few limited exclusions to the conflict of interest
provisions and a company should take appropriate steps to ensure
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.
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The Act has brought about fundamental changes in the manner in which shareholder resolutions are passed.
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