31 October 2018 by and Corporate & Commercial Alert

Director overboarding – conflicts of interest in terms of section 75 of the Companies Act, 2008

It seems the frustrations with the Companies Act, 2008 sometimes manifest themselves through overly cautious and broad definitions which cast the net wide enough to include almost anyone (and their second cousin, twice removed). One of these definitions makes a number of appearances in the Act, but for today, we will focus on the infamous “related persons” featured in s75 of the Act, which deals with director’s personal financial interests.

Section 75(5) of the Companies Act, 2008 stipulates that if a director has a personal financial interest, or knows that a related person has a financial interest, in any matter to be considered by the board of the company, that director must:

  • firstly, disclose the interest to the board; and
  • secondly, recuse himself and not take any further part in the consideration of that matter.

The practical problem with s75(5) lies in the inclusion of “related persons” which by itself makes the application of the section far-reaching, but which is further widened by s75(1)(b) which effectively captures any company of which the director or a related person of that director is also a director.

Consider a high-profile individual who serves on several boards. In any material transaction or agreement between two companies where she serves on both boards, she is required to comply with s75 (for each board) even if she does not have any personal financial interest in the matter. This seems like fairly sensible corporate governance.

However, let us consider another common example where s75 causes difficulties - intra-group transactions. You will appreciate that the likelihood of members of a board having common directorships in another company within a group is relatively high. So, in any transaction or agreement between two companies in the same group, the common directors have to disclose their interests and recuse themselves from the meeting, resulting in a dwindling number of directors capable of voting on the resolution. If you have no directors left to deal with the matter after the disclosures and recusals (you could easily have two boards with the exact same directors within a group), a quorum might nevertheless be met, but without anyone left in the boardroom to pass the resolution.

The Companies Act clumsily tries to assist by providing that a board decision will be valid where (i) the financial interest disclosure has been made in compliance with s75, even when no recusal has taken place (the emphasis is on the disclosure); or (ii) where no financial interest disclosure has been made, if the problematic resolution is ratified by an ordinary resolution of the shareholders of the company or declared valid by a court. It may be that the best approach is for the directors to make the disclosures and then pass the resolution anyway, with the shareholders ratifying the decision thereafter.

This matters because failure to comply with s75 could potentially lead to the invalidity of the board resolution, and possibly even the entire transaction. Whilst s75 does allow for the shareholders of the company to ratify the decisions made or for an application to be made to court to validate the resolution, either option could be quite an expensive and time consuming ordeal (particularly in the context of a listed company).

The provisions of s75 may lead companies to make more strategic selections in the appointment of directors in order to avoid having directors with technical conflicts in what are otherwise day-to-day transactions. As if finding suitable board candidates wasn’t already a sizeable task, imagine going through the difficulty of identifying experienced, appropriately qualified, diverse, non-conflicted board candidates that comply with your BEE requirements, and then adding the criteria of not having any potential technical conflicts, and you and your board of (potentially conflicted) directors may find yourself back at square one.

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