1. Introduction

The Companies Act 71 of 2008 (the Act) has been the catalyst for a number of changes undertaken by companies since the Act’s inception. First, companies were challenged by the idea of a new regulatory environment, with its own new requirements and principles, such as alterable and non-alterable provisions. Thereafter, companies had to review their constitutive documents and to come to terms with new matters of control, reserved matters, and the implications of different classes of shares.

With the nearing conclusion of the 2014 year and Season’s Greetings being sent out by most, we thought it a great opportunity to take stock of some of the pertinent issues that have arisen in terms of compliance with the Act.  

2. Three years down the line

The Act was promulgated in 2009 and became effective on 1 May 2011. Since then, most companies have, in varying levels of depth and intensity, come into contact with the provisions of the Act.

During the year, we have been fortunate to have been briefed by an extremely valued client of RSM to undertake the compilation of a Companies Act Compliance Report for the board of the client. It entailed an investigation as to the current status of compliance with the Act of an entity listed on the JSE, and a subsidiary company of the client.

Our findings were that, even though the client had an exemplary record of compliance with the Act, the more detailed and complex provisions of the Act would require further attention by the client.

A typical example of a more detailed and complex provision of the Act requiring compliance, would be Section 75 of the Act, relating to personal financial interests of directors.

3. Compliance with Section 75: Personal financial interests of directors

The provisions of Section 75 of the Act apply to any director, alternate director, prescribed officer and member of a committee of the board, and any person related to the aforementioned.

Section 75(4) of the Act provides that a director may at any time disclose any personal financial interest in advance to the board as a general or standing notice. This notice must be in writing and state the nature, and extent, of the interest. This saves the director from the inconvenience of having to declare his (or her) interest at every board meeting. The general notice remains operative until it is changed or withdrawn.  

“Personal financial interest” means a direct material interest of that person of a financial, monetary or economic nature, or to which a monetary value may be attributed. The financial interest must also be material. 

Section 75(5) of the Act deals with proposed transactions, and requires that a director discloses any personal financial interest that he (or she) or a related person has in respect of a matter to be considered at a meeting of the board. The declaration of the director’s personal financial interest must be made in advance to the board, setting out the nature and extent of that interest, and any other material information relating thereto. 

Section 75(5) of the Act requires “disclosure” by the director, rather than approval of his (or her) personal financial interest. As such, if the board makes a decision or approves the transaction or agreement, or if it is ratified by an ordinary resolution of shareholders, the decision, transaction or agreement will be valid despite the personal financial interest of the director.

Section 75(6) of the Act deals with the declaration by a director of a personal financial interest in an agreement, or other matter in which the company has a material interest, after the agreement or matter was approved by the company. The director must promptly disclose to the board the nature and extent of the interest, and the material circumstances relating to the acquisition of the interest. Again, the financial interest must be material and the company must likewise have a material interest in the agreement or matter. 

The disclosure of the personal financial interest in terms of Section 75 of the Act should apply to the company, to each wholly owned subsidiary of the company, and to every other company within the group of companies.

4. Non-Compliance with Section 75

A decision, transaction or agreement approved by the board, is valid despite any personal financial interest of a director or related person, only if it was approved after disclosure of the interest.

A decision, transaction or agreement approved by the board would also be valid if it was approved without disclosure of the interest, and it had been subsequently ratified by an ordinary resolution of the shareholders after disclosure of the interest. A court may also validate such decision, transaction or agreement.   

The director who failed to declare his (or her) personal financial interest, or that of a related party, will be in breach of his (or her) fiduciary duty in terms of Section 75 of the Act, and the director would be liable for any loss suffered by the company, unless the transaction is ratified by an ordinary resolution of shareholders.

5. Conclusion

Many companies have dealt with the broad matters requiring compliance of the Act. It is, however, not sufficient to merely comply with the Act in broad strokes, or on a superficial level. The regulatory environment has reached a stage where compliance is required with the detailed and complex provisions of the Act. Non-compliance with sections such as Section 75, Section 76 and Section 45 of the Act may lead to personal liability for the directors of a company. These “hidden dangers” for directors should surface when companies undertake a compliance investigation. Through the compilation of a Companies Act Compliance Report, potential risks that need to be addressed by the board of the company will come to the fore.

Phillip Kruger

Legal Advisor, Johannesburg