One of the duties imposed on a director of a company is the duty to avoid conflict of interest - this forms part of the director‟s fiduciary duties. This duty has always existed under common law, as gleaned from the decided court cases, but it has now been codified in the Companies Act1 ("the Act"), under section 75 of the Act.
It is important to note that the section does not only apply to directors (in the common sense) but it also applies to alternate directors, prescribed officers and members of the board committees whether such persons are members of the board of directors or not2. A prescribed officer can be defined as any person who exercises general executive control over and management of the whole, or a significant portion, of the business and activities of the company, or regularly participates to a material degree in the exercise of general executive control over and management of the whole, or a significant portion, of the business and activities of the company3.
In simple terms, a director (in the wide sense) who is in any way interested in a transaction that the company is involved in, or about to be involved in, must declare his or her interest before such a transaction is discussed and decided upon by the company. The duty to disclose also applies where it is not the director per se who has a personal financial interest but it is a person related to that director. The Act defines "personal financial interest" as "a direct material interest of that person, of a financial, monetary or economic nature, or to which a monetary value may be attributed"4. An interest held by a person in a unit trust or collective investment is, however, excluded from the definition of "personal financial interest", unless the person has a direct control over the investment decisions of the fund in question.
It is important to note that the interest in question must not only be direct but it must also be material, ie it must be significant in the particular circumstances. What is material will necessarily depend on the facts of each and every case as it is impossible to make any hard and fast rules. It is also important to note that what the Act requires is disclosure of the personal financial interest and not necessarily the approval thereof.
Essentially, what a director (again, in the wide sense) needs to disclose is the following:
- The personal financial interest that he or she, or his or her related person, has and its general nature. This has to be done before the matter is considered by the board of directors; and
- Any material information relating to the matter and known to him or her.
Once the director has made the disclosure, he or she is required to then recuse him or herself from the meeting and must not thereafter sign any document relating to the matter, unless he or she is specifically directed to do so by the board5. It may sometimes happen that the director acquires the personal financial interest after the company has concluded the agreement, in which case the Act requires such a director to promptly disclose to the board the nature and the extent of the interest6. In view of the fact that the disclosure needs to be made to the board of directors of the company, in cases where the company only has one director but that director is not the only shareholder in the company, the director must disclose to the company‟s shareholders7.
Section 75(2) provides that it is not necessary to disclose personal financial interest where:
- The matter concerned generally affects all the directors in their capacity as directors;
- The matter concerned generally affects a class of persons of which the director is a member, unless the only members of that class are the director or a person related or inter-related to him or her;
- The issue relates to the removal of that director from office; or
- The director is the sole director and shareholder of the company.
If a decision, transaction or agreement is approved by the board of directors after the director has disclosed his or her personal financial interest, such a decision will be valid. It will also be valid even if the disclosure was not done but the decision was subsequently ratified by the shareholders, or if an interested person applies to court for a declaration that such a decision is valid despite the non-disclosure. However, unless the decision is subsequently ratified by the shareholders, the director concerned would be in breach of his fiduciary duty and may be liable for any loss, damage or costs that the company may suffer as a result of such failure to disclose.
In light of the above, it is critical that any person who is a director of a company – bearing in mind the wide sense of the definition of director‟ – must ensure that he or she discloses any personal financial interest he or she may have in the matter to be discussed by the board. Failure to do so may have dire consequences for the director concerned.
1 Act 71 of 2008 (as amended)
2 Section 75(1) of the Act
3 Section 1 of the Act, read with Regulation 38(1) of the Act
4 Section 1 of the Act
5 Section 75(5)(g)
6 Section 75(6)
7 Section 7e5(3)
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.