Background:

The Companies Act No. 71 of 2008 (“Companies Act”), sets out specific provisions for dealing with conflicts of interests in a company, these provisions provide clarity on how a company should deal with a conflict pertaining to a director of a company, to ensure that transparency and accountability is maintained.

A conflict of interest arises when a director’s personal interest compromises their ability to act fairly and impartially on behalf of the company. This may include personal, financial, or other interests that could unduly influence the director’s decisions or actions in their official role, ultimately affecting the responsibilities the director owes to the company, a personal financial interest refers to a direct and material interest of a financial, monetary, or economic nature, or one to which a monetary value can be assigned, excluding interests held in a unit trust or collective investment scheme unless the individual has direct control over the investment decisions of that fund or scheme.

This article explains how conflicts of interest should be dealt with in a company in light of specific duties imposed on directorships, ensuring that corporate integrity is maintained, shareholders’ interests are protected, and fair decision making is made.

Duty to disclose:

Directors of a company must disclose any personal financial interests in matters being considered by the board as soon as they become aware of the conflict. This disclosure should be recorded in the minutes of the company’s board meeting.

Recusal from decision-making:

Upon a conflict of interest being disclosed by a director, the director must recuse themselves from participating in any discussions and/or decisions related to the matter. The director is required to leave the meeting for the duration of the discussion and decision being made on the conflicted matter to ensure they do not influence the outcome.

Approval of transactions:

Transactions that involve a director’s personal financial interest must be approved by the board of directors or the shareholders. Directors are required to act in good faith and in the best interests of the company when approving such transactions, ensuring that they remain fair and reasonable.

Improper personal gain:

Directors must ensure that they do not use their position, or any information obtained while acting as a director to gain personal advantage or to benefit any other person, except for the company. Directors must also refrain from causing harm to the company through their actions or omissions.

Shareholder approval:

In some cases, significant conflicts of interest may need to be approved by shareholders, ensuring fairness and transparency. Shareholders must be given all relevant information concerning the matter, ensuring that the shareholder makes an informed decision.

Consequence if there is a conflict of interest:

If a director fails to disclose their personal interests, they may be held personally liable for loss, damages or costs sustained by the company as a consequence of any breach they have caused acting in bad faith or with gross negligence, under Section 77(2)(a) of the Companies Act, as this constitutes a breach of their fiduciary duties as a director, to act in the best interests of the company. This includes situations where their actions or decisions are influenced by personal interests, unduly affecting the company.

Additionally, under Section 75(7) of the Companies Act, if a director fails to disclose a conflict of interest when the company is considering providing financial assistance to them or a related party, any such assistance may be deemed invalid. The director’s failure to disclose can result in severe legal and financial consequences, including personal liability for damages caused by their improper actions.

Conclusion:

Directors are obligated to perform their duties with the requisite care, skill, and diligence, including avoiding conflicts of interest and acting in the company’s best interests. Failure to disclose a conflict of interest can lead to significant consequences, including liability for any resulting damages or losses. The Companies Act sets out mechanisms for the company to adequately address breaches of duty. Overall, the Companies Act enforces stringent procedures for managing conflicts of interest to uphold integrity and accountability in corporate governance. By mandating full disclosure, recusal from decision-making, and the appropriate approval processes, the Companies Act seeks to ensure the prevention of the misuse of power and ensure that directors consistently act in the company’s best interests.

Published 2 December 2024