Muhammad Talha Kazi | Secretariat Department
One of the fundamental duties of a director is to avoid any possible conflict of interests with the company. It is an accepted principle in South African law that, as a result of the trust placed in the director, he or she is bound to put the interests of the company before their own personal financial interests.
What are “personal financial interests?”
Section 1 of the Companies Act defines a “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.”
The word “material” is defined as “significant in the particular circumstances to a degree that is:
- of consequence in determining the matter; or
- might reasonably affect a person’s judgment or decision making in the matter.”
What are the disclosure requirements in respect of personal financial interests?
Section 75 (5) of the Companies Act sets out a detailed disclosure procedure to follow at board meetings, which includes that a director:
- must disclose the interest and its general nature before the matter is considered at the meeting;
- must disclose to the meeting any material information that relates to the matter and is known to the director;
- may disclose any observations or pertinent insights relating to the matter, if requested to do so by the other director;
- if present at the meeting, must leave the meeting immediately after disclosing material information and observations or pertinent insights as required above;
- must not take part in the consideration of the matter, except to the extent that material information and observations or pertinent insights are disclosed as required above;
- while absent from the meeting, must be regarded as present at the meeting for the purpose of determining the quorum. However, the director is not regarded as present at the meeting for the purpose of support to adopt the resolution;
- must not execute any document on behalf of the company in relation to the matter unless specifically requested or directed to do so by the board.
It should be noted that section 75 of the Act extends to prescribed officers and members of board committees (even if those persons are not directors) of the company. These provisions apply equally to persons related to the director. Thus, where a director knows that a related person has a personal financial interest in a matter to be considered at a meeting of the board, or knows that a related person has acquired a personal financial interest in a matter, after the board has approved that agreement or matter, the director should disclose that fact to the board.
What are the implications for failing to disclose a conflict of interest
A failure to disclose a conflict of interest would amount to a breach of a fiduciary duty on the part of the director. Section 77, dealing with liability, applies to directors, prescribed officers and members of board committees, irrespective of whether such persons are members of the board of directors. Where a director breaches his or her fiduciary duty, regarding conflicts of interest, such director will be liable for any loss, damages or costs sustained by the company as a result of such breach.
In a judgment delivered in the case of S v Gardener 2011 (4) SA 79 (SCA), two CEOs were convicted of fraud for intentionally and fraudulently not disclosing their interests of a personal nature in certain contracts within the company. The judgement declared inter alia that a company can only make decisions through a properly informed board, and by withholding proper information, directors render the board both “blind and mute”.
Practical steps to manage conflicts of interest in line with industry best practices
The King IV Report on Corporate Governance provides useful guidance on how to manage a conflict of interest. One of the recommended practices is that at the start of each board meeting, directors ought to declare any conflict regarding any item on the meeting agenda, and such conflict must then be managed adequately and in line with legal provisions.
Also recommended, is that each director ought to submit a declaration of all financial, economic and other interests held by the director and related parties at least once a year, or when there are material changes thereto.
Each meeting agenda ought to have a standing item at the beginning of the agenda on declarations of interest. Any such declaration must be properly minuted, and the chairperson must ensure that such declaration is managed appropriately with due processes followed.
Directors have a fiduciary responsibility to disclose conflicts of interest and to act with unfettered discretion. Where directors breach this duty, they stand to attract civil and criminal sanctions. Conflicts of interest have the potential to damage the company as any decision taken in which a director has an undisclosed personal financial interest may be rendered void.