The Game is Afoot: Unravelling Director Disclosures in Accordance with Section 75

Directors of a company have a fiduciary duty towards the company and must accordingly act in the best interests of the company at all times and therefore place the company’s interest ahead of their own interests. There are, however, circumstances where directors may be in a position where their personal interest conflicts with the interest of the company to which they are a director.

Section 75 operates on the principle that transparency is the cornerstone of effective governance, akin to Holmes' reliance on careful observation and deduction. Directors must disclose any direct or indirect interests they have in proposed transactions, contracts or resolutions. This allows stakeholders to assess potential conflicts and ensures that decisions are made in the best interests of the company rather than for personal gain.

However, as we know, the truth is rarely pure and never simple, and it is important to note the complexities of corporate dealings and disclosures in terms of Section 75.

Directors are required to disclose if they, or a related party, have any direct personal financial interest that could influence a matter to be determined by the company’s board. A related party includes juristic entities to which a director exercises control over or natural persons such as a spouse and/or close family members up to two degrees of affinity.

The Act defines a personal financial interest as a direct material interest of a financial, monetary, or economic nature, or to which a monetary value can be attributed. It states further that personal financial interest does not include any interest held by a person in a unit trust or collective investment scheme, unless that person has direct control over the investment decisions of that fund or investment.

Therefore, if a company engages in a transaction where a director is also party to the transaction in their personal capacity, for instance where the company enters into a commercial lease agreement in terms of which the director is a landlord, this will typically necessitate a Section 75 disclosure from the director. Additionally, if a director has a share in another company (as a competitor, supplier or otherwise) that is entering into an agreement with the company to which they are a board member, this too, will require a Section 75 disclosure.

However, the scenario that is often overlooked, is where a director serves on the board of multiple parties involved in a single transaction (i.e. the director is a member of both the board of the target entity as well as that of the purchaser in a sale of shares or sale of business transaction). In such cases it is not certain whether they meet the threshold of having a personal financial interest, but nevertheless there may be competing interests of the respective companies which may ultimately conflict with the director’s fiduciary duties.  In this case, the conservative approach is that if a director serves on the boards of multiple parties involved in a transaction, they are required to make a disclosure under Section 75. Although the argument can be made that being a director of multiple entities involved in a transaction is not automatically synonymous with having a personal financial interest. The broad definition of "personal financial interest" makes a Section 75 disclosure in these cases the prudent option. When it comes to corporate governance and ensuring the company’s house is in order, the old adage 'better safe than sorry' is applicable.

After a director has made a disclosure in terms of Section 75, in relation to a matter or transaction to be considered by the board, there are two options:

1. the director in question can recuse themselves from the vote; or
2. the board can seek shareholder approval to permit the director to vote on the matter, notwithstanding their Section 75 disclosure.

In certain instances, it is not always practicable/preferable for a director to recuse himself from the vote, and consequently, option 2 may be followed.

Where it is elected to proceed with option 2, shareholder approval should be obtained prior to the board considering the matter. Therefore, pursuant to obtaining shareholder approval, the conflicted director may vote on the matter in question.

A resolution which was approved without the proper disclosure being made is invalid unless such non-compliance with the disclosure requirements is subsequently cured.  Where the necessary disclosure has not been made there is the saving grace provided in section 75(7) of the Act which states that a decision by the board, can be validated, despite having been approved without proper disclosure, if it is subsequently ratified by an ordinary resolution of the shareholders following disclosure of that interest, or it has been declared to be valid by a court.

Where proper disclosures are not made, the conflicted director may face claims for damages from the shareholders, the company or even third parties and possibly criminal prosecution for fraud or theft if he/she is held to have deliberately and knowingly withheld material information from the company with regard to his/her personal financial interests in a transaction with the company, in order to induce the company to act to its prejudice.

Embracing Section 75 and ensuring that proper disclosures are made is elementary, my dear reader.