Where directors of a company allow their personal financial interests to interfere with their duties to the company the consequences can be far-reaching, as illustrated by the recent judgment of the Commercial Court of the Gauteng Division of the High Court of South Africa in Atlas Park Holdings (Pty) Ltd v Tailifts South Africa (Pty) Ltd SA 28817/2020  ZAGPJHC 109.
Section 75(3) of the Companies Act 71 of 2008 (“the Act”) provides that a director may not approve or enter into any agreement in which the director or a related person has a financial interest, unless the agreement is approved by an ordinary resolution of the shareholders of the company, after the director has disclosed the nature and extent of his interest in the transaction to the shareholders. Without the necessary disclosure by the director the agreement will be void.
Section 75(8) of the Act, however, provides that a court, on application by any interested person may declare valid a transaction or agreement that had been approved by the board or shareholders despite failure of the director to satisfy the disclosure requirements of this section. This case illustrates the kind of considerations which a court may take into account when deciding whether or not it will validate a decision, agreement, or transaction and what will qualify as a full and complete disclosure by a director.
Atlas Park Holdings (Pty) Ltd (“Atlas Park”) brought an application in terms of section 75(8) of the Act to declare valid a lease agreement and subsequent amendment thereof concluded between Atlas Park as lessor and Tailifts South Africa (Pty) Ltd (“Tailifts”) as lessee, despite the non-disclosure by a director of both Atlas Park and Tailifts, Van Breda, of his financial interest in Atlas Park and its associated companies. Tailifts argued that the lease agreement was invalid because of Van Breda’s conflict of interest and breach of his fiduciary duties owed to Tailifts, by not disclosing his personal financial interest to his co-director of Tailifts.
The corporate opportunity:
Tailifts’ main contention was that Van Breda created a corporate structure within which a special purpose vehicle secured finance for both the buyout of a major shareholder in Tailifts and also the property which formed the subject of the lease agreement in question thereby allowing Atlas Park to acquire the property which was leased by Tailifts and used for its manufacturing operations. The structuring of funding for the acquisition of the property was not disclosed by Van Breda to his co-director of Tailifts, thereby denying Tailifts the opportunity to consider whether it should acquire the property itself. Instead, an addendum to the original lease agreement was signed by Van Breda as director of both Atlas Park and Tailifts, extending the lease duration for a further 10 years on less favourable terms, even though a substantial part of the original lease period still remained.
The court considered the questions whether the failure by Van Breda to disclose the details of the structure of the Atlas Park funding to his co-director of Tailifts falls within the ambit of section 75(3), and whether the Act imposes a fiduciary duty on directors not to misappropriate a corporate opportunity or not to compete with their company. The court held that although section 75(3), read with the common law, does not specifically refer to the “misappropriation of a corporate opportunity”, it does apply to a director’s conflict of interests, including the misappropriation of a corporate opportunity.
Van Breda acknowledged that the acquisition of the leased property by Tailifts was a corporate opportunity, but argued that Tailifts would not have been able to obtain the necessary funding from its bank. This constituted an admission by Van Breda that he was aware of the symbiotic relationship between the ownership of the property and the business of Tailifts, and that it would have been to the obvious advantage of Tailifts to acquire the property, either directly or through a special purpose vehicle.
The court held Van Breda’s conduct was not a mere oversight, but amounted to using for his own advantage the assets of Atlas Park or the securitisation of its income stream from the lease, and deliberately not informing his co-director of Tailifts of the financial leverage that could have been secured for Tailifts. This potential leverage was a corporate opportunity and not disclosing it, was a breach of fiduciary duty.
The interpretation of “related person” and a “direct or indirect financial interest”:
Van Breda, on behalf of the Atlas Park, contended that an indirect financial interest is not covered by section 75(5) of the Act, and that a “related person” as referred to in that section is limited to a company in which the director is also a director.
Interpreting the definition of “related” the court held that it should be understood broadly, to include an individual who directly or indirectly controls a juristic person, and that the application is extended by section 2(2)(d) of the Act, which states that control will also arise if a person has the ability to materially influence the policy of the juristic person. It was clear that Van Breda could materially influence the policies of both the companies involved.
The court found that Van Breda indeed had a personal financial interest in the lease agreement as a director of Atlas Park and as a person who controlled both the company itself and its intermediate, penultimate and ultimate beneficial shareholders.
The court found it unnecessary for the purposes of the case to go any further than to find that a shareholding in a company which has a financial interest in a transaction meets the requirement for holding a direct financial interest, if such shareholding is held by either the director concerned or even if the director knows that a related person has a shareholding in a company which has a financial interest in the transaction.
The court was of the view that the legislature would have been astute to realize that interposing a single juristic person, or a multitude of them, between the conflicted director and the entity in which that director has a personal financial interest would be a simple way to get around the underlying purpose of the Act.
The mischief at which section 75(3) of the Act is aimed is non-disclosure by a director who is conflicted in respect of a company transaction, resulting in the transaction being void.
The court accordingly dismissed the application by Atlas Park, finding the Lease Agreement to be void for the following reasons:
The court emphasised that section 75 is aimed at non-disclosure by directors of their financial interests in a company transaction. It is imperative that directors understand their fiduciary duties and disclosure obligations in this regard.