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Director’s duty to disclose financial interests by Carl Prinsloo

Directors have a duty of disclosure where personal interests may be in conflict with that of the company and other stakeholders in the company. Section 75 of the Companies Act, 71 of 2008 (“the Act”) describes the circumstances where this duty of disclosure to the board of directors or shareholders applies.

When does the duty of disclosure apply?

Section 75 requires that all direct, material personal financial interests of a director, prescribed officer or committee member of a company must be disclosed to the board where the personal financial interest of a director is relevant to any matter to be considered by the board. Where a board consists of only one director, disclosure must be made to the shareholders. Full disclosure must be made, which entails providing sufficient information to indicate how the personal financial interest may relate to a decision of the board.

Section 75(2) of the Act describes instances where directors do not have a duty of disclosure. This includes the situation where the decision may generally affect all of the directors of the company in their capacity as directors, or a class of persons, despite the fact that the director is a member of that class of persons, unless the director or a person related to the director is the only member of that class of persons. Understandably the duty of disclosure does not apply to a decision regarding a proposal to remove that director from his or her office. The duty also does not apply where the director is the only director of the company and the beneficial interest holder of all of the issued securities of the company. If other beneficial interest holders of issued securities of the company exist, disclosure must be made to them.

It is important to note that the duty of disclosure applies not only to directors, but also to other prescribed officers and committee members of the board of a company who are not formally recognised as directors. Regulation 38 under the Act defines a prescribed officer of a company as any person who exercises, 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 company.

In terms of section 74(5) the duty to disclose also applies where the director or officer knows that a party related to them has a personal financial interest in the matter to be considered by the board of the company. A related party in terms of section 75 does not only extend to individuals related to the director, but also to juristic persons, such as another company or close corporation of which the director or a related person is a director or member.

The inclusion of “related persons” in section 75 creates a difficulty: One cannot possibly be expected to be aware of all of the business affairs of those related to you. The Act makes provision for this situation. Section 1 of the Act  defines “knows” in such a manner as to not only include actual, subjective knowledge, but also those instances in which a person reasonably ought to have had actual knowledge. Therefore, where a director was not aware of a related person’s financial interest in a matter and a reasonable person in that director’s shoes would not have been aware of that financial interest, the director would not contravene the provisions of section 75. This is a factual question and will be determined on a case-by-case basis.

When and how must disclosure be made?

There is no advance duty to disclose personal financial interests when employment or appointment takes effect. However, section 75(4) does provide for optional advance disclosure, by delivery to the board or shareholders a notice in writing setting out the nature and extent of that interest, to be used generally for the purposes of this section, until changed or withdrawn by further written notice from that director. Generally the duty of disclosure only arises where such personal financial interest becomes relevant to a decision to be made by the board of the company. The director or officer may disclose the personal financial interest in advance of the relevant board meeting, by means of a written notice delivered to the board in which that director sets out the nature and extent of the interest. Otherwise, the director must disclose the interest at the meeting before it is considered by the board. Immediately after such disclosure, the director must leave the meeting and may not by any means take part in the consideration of the matter. That director will be regarded as being present at the meeting for the purpose of determining whether sufficient directors are present to constitute a quorum for the meeting (section 75(5)(f)(i)).

Under section 75(6), if a director of a company acquires a personal financial interest in an agreement or other matter in which the company has a material interest, or knows that a related person has acquired a personal financial interest in the matter, after the agreement or other matter has been approved by the company, the director must promptly disclose to the board, or to the shareholders the nature and extent of that interest, and the material circumstances relating to the director or related person’s acquisition of that interest.

What are the consequences of non-compliance?

If a director does not comply with the duty of disclosure under section 75, the resolution taken or agreement entered into by the board will be void. However, section 75(7)(b) of the Act provides that the resolution or agreement may be validated if the resolution or agreement is subsequently (a) ratified by means of an ordinary resolution of the shareholders , i.e. by a 50% plus 1 vote, or (b) is declared to be valid by a court.

Directors, prescribed officers and committee members of a company should therefore carefully consider section 75 of the Act, because the consequences of non-compliance may be severely harmful to the director or official and to the company.

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