Managing Conflicts Of Interest

• VINCIA CLOETEDIRECTORS have a statutory duty in terms of Chapter 8 (Parts 5 and 6) of the Companies Act 28 of 2004 to declare conflicts of interest. There is a further common law fiduciary duty to avoid conflicts of interest and to act in the best interest of the company – not for some other collateral purpose.

Disclosure requirements of the act do not override the common law duties and principles of good faith. The purpose of the statutory provisions is simply to lay down minimum disclosure requirements.

In terms of the Companies Act, disclosure is required where there is a personal interest in a contract, transaction or any matter of significance in relation to the business of the company. Where there is doubt as to whether a particular interest should be disclosed or not, it is recommended that full disclosure be made.

Although vaguely implied, the director must disclose interests of parties related to him/her. Officers other than directors are hit by the provisions of the act only if they were the ones to execute the contract on behalf of the company.

When should conflicts of interest be declared? King IV recommends that real or perceived conflicts of interest (financial, economic or other interest) be declared contemplatively and proactively.

In view of that, directors may disclose any personal interests in advance of a board meeting, by declaration to the board, a written notice setting out the nature and extent of that interest, until changed or withdrawn by further written notice from that director. This is typically a standing notice of interest, submitted annually. A register of interests must be updated accordingly.

In addition, if the director has a personal interest in respect of a matter to be considered at a meeting, as an agenda item, the director must disclose such interest and its nature, any material information or insight relating to the matter before recusing him/herself. This should be properly recorded in the minutes following the meeting.

In terms of the act, the conflicted director can still deliberate and vote on the matter if the memorandum of association permits this. King IV, however, advises that such a director must recuse him/herself from the meeting immediately and remain absent during deliberations on related matters, lest the director has psychological influence on the decision of voting directors. The minutes of the meeting should record why the board member left the room and at what time they returned to join the meeting. If legal advice is that the conflict cannot be resolved, then the board member must resign from the board.

While the director is absent, he/she is regarded as been present for the purpose of determining quorum to constitute the meeting, but not for the purpose of determining whether a resolution has sufficient support to be adopted.

A conflicted director 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 – such a directive should be articulated by a resolution, specifically naming such a director as authorised agent and signatory for the company.

If a director acquires a personal interest in an agreement or other matter in which the company has a material interest, after the agreement or other matter has been approved by the company, the director must promptly disclose to the board the nature and extent of that interest.

Failure to comply with the above disclosure requirements leads to invalidity of the board resolution and ensuing transaction, unless the shareholder ratifies it or an application is successfully made to court to validate the resolution and the transaction. Also, the company’s articles may contain a clause which allows directors to have an interest in contracts entered into by the company – this effectively modifies the directors’ fiduciary duty and is thus limited by the provisions of the act.

Unless the invalidity is cured as indicated above, it will persist and the director may face possible civil claims for damages from shareholders, the company, or even third parties or criminal prosecution for fraud or theft if he/she is held to have deliberately and knowingly withheld material information from the company with regards to his/her personal interests in a contract or dealing with the company.

The principle is not to prohibit a director absolutely from deriving any benefit from his directorship in addition to his/her directors’ fees where this interest has been duly disclosed and the affected director has not in any way influenced the company’s decision to contract, but rather to instil a culture of transparency and accountability where the penalty attaching to non-disclosure is the forfeiture of any gains made by a delinquent director.

Finally and most importantly, the NamCode and King IV recommend that companies adopt rigorous policies for identifying and managing conflicts of interests. Such a policy should aim to set objective standards designed to help board members to effectively identify, disclose and manage any actual, potential or perceived conflicts of interest in order to protect the integrity of the company and manage risk.

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