Mischief managed: Directors’ duties and section 75 of the Companies Act
Mischief managed: Directors’ duties and section 75 of the Companies Act
A company is a transformative vehicle capable of providing stakeholders with great financial gain and serving as a catalyst for societal impact. Key to this are its distinct features as a business structure, one of them being the separation of ownership and control. Whilst shareholders own the venture, directors are responsible for directing and controlling the business and affairs of a company.
At a glance
- Directors of a company have a responsibility to disclose personal financial interests and recuse themselves from meetings where conflicts of interest may arise, as outlined in section 75 of the Companies Act.
- In a recent case (Atlas Park Holdings v Tailifts), the court ruled that directors must disclose direct personal financial interests as well as interests held by related persons in transactions, requiring transparency even in upstream entities.
- The court's interpretation has raised concerns about the practicality and scope of blanket disclosures, and the need for a more nuanced approach to managing conflicts of interest under section 75. Directors are held to higher standards than other office bearers in a company and must navigate these requirements carefully.
Directors are continually held to higher standards, due to their ability to make vital decisions relating to the running of a company, as evidenced by section 75 of the Companies Act 71 of 2008 (Companies Act). A director must not place themselves in a position where their personal interests would conflict with their duties owed to the company, and to whom they stand as a fiduciary. This section regulates those instances. Any mischief in this regard is sought to be managed by disclosure and recusal.
Section 75 requires a director to disclose any personal financial interest that they or a related person has in respect of a matter to be considered at a meeting of the board of directors and recuse themselves from said meeting. Non-disclosure will render an agreement or transaction void unless it has been subsequently ratified by an ordinary resolution of the shareholders following disclosure or if it has been declared valid by a court.
In terms of section 75(8) of the Companies Act, an interested person may apply to a court to have an agreement or transaction, approved by the board, declared valid. The Commercial Court recently grappled with the interpretation of section 75 in the context of such an application.
In Atlas Park Holdings (Pty) Ltd v Tailifts South Africa (Pty) Ltd  28817-2020 (GJ-Com) (Atlas Park Holdings v Tailifts), Mr van Breda on behalf of Atlas Park Holdings (Pty) Ltd (Applicant), brought an application in terms of section 75(8) to declare valid the terms of a lease agreement, and a subsequent addendum to it, purportedly concluded between the Applicant as lessor and Tailifts South Africa (Pty) Ltd (Respondent), as lessee.
The application was brought due to van Breda’s directorships with the Applicant, the Respondent, and certain upstream entities of the Applicant’s, when the agreements were allegedly signed. The Applicant’s legal contention, made through van Breda, was that it was entitled to relief under section 75(8) because all necessary disclosures were made in relation to the Applicant’s direct personal financial interest, due to van Breda’s directorship in the Respondent, and that to the extent any necessary disclosures were not made in relation to upstream entities of the Applicant, then this was only in relation to indirect interest which is excluded by section 75.
The key issue was whether a director must only disclose a direct personal financial interest or if the director knows a related person has in an agreement or transaction pursuant to section 75. In its consideration of the mater, the Commercial Court assessed the definition of “personal financial interest” in section 1 of the Companies Act, being:
“...a direct material interest of that person, of a financial, monetary or economic nature, or to which a monetary value may be attributed but;
(b) does not include any interest held by a person in a unit trust or collective investment scheme in terms of the Collective Investment Schemes Act, 2002 (Act No. 45 of 2002), unless that person has direct control over the investment decisions of that fund or investment;” (own emphasis).
The court highlighted that the word “direct” cannot be taken out of this context and its interpretation must include an obligation to disclose if the transaction under consideration involves a related person which itself has a personal financial interest – which, by definition, requires the interest to be a direct and material one.
The court held that this interpretation strongly indicates that any shareholding held in a company, which has an interest in the relevant transaction, other than a unit trust or collect investment scheme, will amount to a direct personal financial interest requiring disclosure in terms of section 75. The court ruled that van Breda’s directorship in upstream entities of the Applicant constituted knowledge of such a shareholding and the consequential personal financial interest. This required disclosure in terms of section 75 which was not forthcoming. The application was, as a result, dismissed with costs.
We have initial difficulties as to the factual basis for the judgment to conclude that control existed throughout the corporate chain. That aside, the judgment is seemingly at odds with the challenges and realities of commercial transactions. The court admits, in quoting Henochsberg, that in determining who the related persons are in a given matter the “possible applications are almost endless”.
Then, surely it was not the intention of the legislature to require blanket disclosure of all interests in all companies that a particular director may have, if the matter under consideration at a board meeting does not involve any of those companies. This would not be practical or desirable. If a related person to a director is not subject to the agreement or transaction at hand, the question then arises as to what purpose a blanket disclosure would serve. Trends in practice indicate that the market has interpreted section 75 to have a jurisdictional requirement which requires a related party to be a party to the transaction in order to be subject to its provisions. This case then, might not be the marauders map to managing section 75 that it strives to be.
On this topic of the connection between shareholders and the management of a company, the court interestingly disagreed with Henochsberg’s view that section 75 must be informed by and perhaps limited to the breaches of fiduciary duty enumerated in section 76 with the common law filling in the gaps. It argued that any potential mischief by directors must be managed and regulated to a higher standard than the provisions of section 76, which, in addition to directors, also deals with other members of a company’s management structure.
In the context of section 75 disclosures and other requirements in terms of the Companies Act, Atlas Park Holdings v Tailifts is an ardent reminder that the directors of a company are held to more exacting standards than other office bearers in terms of our law. Navigating such waters can often prove tricky and requires careful consideration.
The information and material published on this website is provided for general purposes only and does not constitute legal advice. We make every effort to ensure that the content is updated regularly and to offer the most current and accurate information. Please consult one of our lawyers on any specific legal problem or matter. We accept no responsibility for any loss or damage, whether direct or consequential, which may arise from reliance on the information contained in these pages. Please refer to our full terms and conditions. Copyright © 2023 Cliffe Dekker Hofmeyr. All rights reserved. For permission to reproduce an article or publication, please contact us email@example.com.
We support our clients’ strategic and operational needs by offering innovative, integrated and high quality thought leadership. To stay up to date on the latest legal developments that may potentially impact your business, subscribe to our alerts, seminar and webinar invitations.Subscribe