Directors of Companies have certain fiduciary duties which require them to protect the interest of those Companies and to use their position for the intended purpose. The Directors must place the interests of their Companies before their own. This is not always possible when Directors are required to decide matters in which they also have personal interests. The Directors concerned will not be able to make objective decisions without at least considering their own interests. The Directors will then be said to have a conflict of interest.
A conflict of interest is not limited to matters where financial gain is a possibility but also any form of advantage.
The Courts have not taken lightly to errant Directors breaching their duties in this regard. This is evident in the Supreme Court of Appeal matter where the Court has extended the ‘no conflict’ duty to not only actual conflicts but also conflicts being a real possibility.
Section 75 of the Companies Act prohibits Directors to enter into any agreement or determine any matter in which they have a personal financial interest.
This section does not apply to directors who hold all the issued securities in the Company.
For purposes of this section, a director also includes a prescribed officer or a person who is a member of a board or audit committee of a company. A prescribed officer is any person who holds an office within the company that has been designated by the Minister in terms of Section 66(11).
When a Director has a personal financial interest in a matter, any person related to them will also be precluded to partake in or determine any such matter. Related persons also include other companies of the Director. A person is considered as related when they are married or live with the Director or when they are separated by no more than two degrees of natural or adopted consanguinity or affinity.
When any Director becomes aware of their personal financial interest, they are required to disclose the nature of their interest in writing before the matter is considered at a meeting. They are further required to disclose any material information relating to the matter. If they are present at the meeting, they are required to leave the meeting once they’ve made the necessary disclosures and cease to partake any further in the matter, unless their continued participation is condoned by a general resolution of Shareholders. The Director may also not influence the decision, directly or indirectly.
The agreement may only be entered into once the director has disclosed their interest and once same has been approved by an ordinary resolution of the Shareholders.
If it so happens that a Director only becomes aware of their interest after the matter has been decided, the Director is required to promptly disclose to the Board, or to the Shareholders, the nature and extent of that interest. The agreement shall only be valid if it is then ratified by an ordinary resolution of the Shareholders.
It may be difficult to understand the concept of conflict of interest and/or recognise when it exists. When considering whether the Director has a conflict of interest it is important to understand the distinction between the company as a separate legal entity and their own personal and financial matters. When the line becomes blurred, and a company is considered as an extension of oneself, a conflict of interest becomes inevitable.
For example, a conflict of interest will be present when a board member uses insider information to make a profitable investment without the permission of the board. Another example is when a Director, who is involved in two companies, attracts Clients from one company to the other. As stated above, the concept has a very wide definition but can generally be described as any act, or omission, which has been prompted by its influence on personal financial affairs.
Greed is one of the main driving forces behind the breaching of fiduciary duties. Should a Director fail to adhere to their duties in terms of the above discussion, they may be faced with claims for damages or restoration from the company or its Shareholders. Shareholders or interested Parties may also apply for an interdict against the delinquent director once they become aware of the conflict. The non-disclosure or failure to avoid may also be fraudulent if it had been done with conscious dishonesty and intent to deceive the company. Breaching of fiduciary duties resulting in fraud might also open the director to criminal liability.
Inadequate knowledge is another major cause of the breach of these duties and because conflict of interest has no doubt proven to be a complex notion it might be sensible to have a Conflict of Interest Policy drafted to plainly inform the Directors of their duties.
[ ] Phillips v Fieldstone Africa (PTY) Ltd (2004) (SCA)