Directors have a fiduciary duty to act in the best interest of the Company which includes the duty to prevent conflict of interest and to maintain unfettered discretion. From time to time situations will arise which could pose a conflict of interest and Section 75 deals with the obligations in relation to the disclosure of personal financial interest and the consequences of a failure to disclose appropriately.
Who does it apply to?
- Registered directors and alternate directors;
- Prescribed officers;
- Members of board committees
It is important to note that not bearing the title or official appointment as “director” does not exempt a person from Section 75 and the duty thus extends to positions such as managing director and chief executive officer.
What needs to be disclosed?
The application of section 75 is broad and requires that personal financial interest must be disclosed and there has to be a disclosure if the director knows that a related party has a personal financial interest in any matter to be considered by the board.
The Act defines “know”, “knowingly” or “knows” as follows:
‘‘knowing’’, ‘‘knowingly’’ or ‘‘knows’’, when used with respect to a person, and in relation to a particular matter, means that the person either—
- (a) had actual knowledge of that matter;
- (b) was in a position in which the person reasonably ought to have—
- (i) had actual knowledge;
- (ii) investigated the matter to an extent that would have provided the person with actual knowledge; or
- (iii) taken other measures which, if taken, would reasonably be expected to have
provided the person with actual knowledge of the matter.
A simplified example demonstrates the effect of the requirements in section 75 – If Company A is negotiating a contract with Company B and Director X’s spouse is a director at Company B, section 75 is triggered
What is personal financial interest?
The Act defines “personal financial interest” and it will include any direct material interest of a financial, monetary or economic nature or a direct material interest to which a monetary value may be attributed.
How do declare in terms of Section 75?
- Disclose the personal financial interest in writing or verbally before the matter is considered by the Board;
- The conflicted director may provide insight or material information to the Board but must then be recused from the meeting and may not participate in any decision making in relation to the matter;
- The conflicted director may not vote on the matter. Voting includes signing a written resolution related to the matter.
In simple terms – Disclose and leave the meeting.
What are the consequences of non-compliance?
Non-compliance with section 75 has far-reaching consequences and to remedy the transgression is not a quick exercise. Any board resolution taken without complying with section 75 is invalid.
Proper consideration of personal financial interest and spending sufficient time at every board meeting on disclosure is worth the effort.
How to ratify a decision taken without proper disclosure?
The solution to non-compliance will take more effort than an apology and a few red faces. There are only two avenues of recourse:
- The decision/board resolution has to be ratified by an ordinary resolution of the shareholders following disclosure of that interest; or
- The decision/board resolution has been declared to be valid by a court.
Recommendations
- As a director, it is your duty to be aware of your obligations and duties in terms of the Act. Give your Company Secretary a time slot at your next meeting to give refresher training;
- Add “declaration of personal financial interest” as a standing agenda item on every board and committee meeting agenda;
- When you deal with declaration of personal financial interest – spend adequate time on the item;
- Review your own personal financial interests and make sure that you have disclosed all that is required;
- Consider who your “related parties” would be and identify any areas of potential conflict or personal financial interest;
- Ensure that the board submit, at least annually, all directorships, direct and indirect shareholding. The disclosure should be readily available to peruse by all directors. Update the Company Secretary if there are any changes;
- If in doubt – disclose to the board and engage;
- Lastly, remember if a personal financial interest has been disclosed – leave the meeting.
“Trust happens when leaders are transparent” – Jack Welch
[1] Section 75 in the Companies Act 71 of 2008 as amended from time to time
[2] Section 2(1) of the Companies Act 71 of 2008 as amended from time to time
[3] Companies Act 71 of 2008 as amended from time to time
[4] Section 1 of the Companies Act 71 of 2008 as amended from time to time
[5] Section 75(7)(b)(i) and Section 75(8) of the Companies Act 71 of 2008 as amended from time to time
By: Yolandi van Zweel
Governance Professional
www.fluidrock.co.za