In terms of the common law all contracts between a director and the company is voidable at the instance of the company (see Phillips v Fieldstone Africa (Pty) Ltd, 2004 case). Approval of the contract by the other directors cannot suffice. A director cannot have an interest in a contract with the company, whether direct or indirect, unless the company in general meeting approves the contract after disclosure to it of his interest. The common law position is essentially a balancing act between the director’s fiduciary DUTIES and his personal interests.
The new Companies Act (71 of 2008) [New Act] illustrates a strict framework for corporate governance namely the fundamental duty of a director to disclose any personal financial interest in any future or existing contracts. The New Act attempts at codifying directors duties in order to make them more accessible for all concerned. By codifying their duties, it in turn makes them unalterable; therefore any provision to the contrary in the memorandum of incorporation is invalid.
There is still a strong reliance on Common Law’s development and interpretation of these duties (i.e. S 158 (a) states that the courts must develop the common law as necessary to improve the realisation and enjoyment of rights established in terms of the Act ). Therefore if the Act is silent on a matter the common law is still applicable. The secret profit rule, the duty not to misappropriate corporate opportunities and the duty not to compete with the company are not specifically dealt with in the Act, but also not expressly excluded. Various interpretations are possible.
The essence of the disclosure requirement is that all direct and personal financial interests of directors must now be disclosed in respect of any matter considered by the board of the company; the significance to the company has no bearing on whether such disclosure should take place. Whereas in the past disclosure was only necessary where there was a personal interest in a contract of significance to the company, and the ‘significance’ was interpreted widely in a manner which allowed for the odd personal interest to slip through the proverbial net.
The New Act not only applies to where a director has an interest in a matter but also where a director knows, after enquiry, that a related person has an interest in a matter which results in directors having to consider a wide range of persons and entities related to directors.
The scope of application of the New Act stretches beyond directors to include alternative directors, prescribed officers as well as committee members.
Once a director has disclosed his personal interest he must recuse himself from the meeting, improving the situation over the Old Act where once a director had disclosed his interest he could still deliberate and vote if the memorandum of incorporation permitted him to do so.
As for the liability of the directors who fail to make such disclosure, the New Act is a further improvement. Failure to comply with s75 leads to voidness not only of the board resolution, but also the ensuing transaction, unless the shareholders ratify it or an application is successfully made to court to validate the resolution and transaction. Failure to make disclosure also opens the director up to liability under common law for loss, damages or costs sustained by the company as well as possible criminal liability. Breach of fiduciary duty can amount to fraud i.e. In S v Gardener (2011 case), the requirements were stated as follows: “The authorities . . . support the view that an intention to cause actual or potential prejudice is a necessary element of the crime of fraud. But it may be that proof of deceit which is calculated (likely) in the ordinary course of things to result in such prejudice is sufficient without a subjective mental element.”
There are certain exclusions with regards to the duty to disclose, it does not apply to a director in regard to a decision that may generally affect all directors of the company concerned.
The New Act also provides the Company with the opportunity in s 218 (2) to sue a director for breach of such duty, as well as shareholders and certain creditors of the company can also sue the directors for loss or damage suffered as a result of the directors actions.