Section 2 of the Companies Act No. 71 of 2008 (“Companies Act”) provides for the circumstances in which a person is considered to be related to another. Section 75 read with section 76 of the Companies Act further provides for the instances in which a director is obliged to disclose a personal financial interest or a personal financial interest of a related person and thereafter have to recuse him/herself from a directors’ meeting.
Section 2(1) of the Companies Act provides for 3 (three) different instances in which persons can be considered related to one another –
- a natural person is considered to be related to another natural person in terms of section 2 of the Companies Act if:
- they are married;
- live together in a relationship similar to a marriage; or
- are separated by 2 (two) or less degrees of natural or adopted consanguinity or affinity,
- a natural person is considered to be related to a juristic person if the natural person directly or indirectly controls the juristic person,
- a juristic person is considered to be related to another juristic person if:
- one juristic person directly or indirectly controls the other or the business of the other;
- one juristic person is a subsidiary of the other; or
- a person directly or indirectly controls each of the juristic person or the business of each juristic person.
Control is an important element in determining whether a person is related to another person for purposes of the Companies Act.
Section 2(2) of the Companies Act states that a person controls a company if the company is a subsidiary of that person or if that person together with a related or inter-related person:
- is able to directly or indirectly exercise or control the exercise of a majority of the general voting rights of the issued securities of the company;
- has the right to appoint or elect or control the appointment or election of a number of directors who control the majority of the votes at a board meeting; or
- if a person is able to materially influence the policy of the juristic person in a manner comparable to a person who would be able to exercise the control stated in points 1 and 2 hereabove.
In terms of section 2(3) of the Companies Act, a court, companies’ tribunal or takeover regulation panel may exempt a person from the provisions of the Companies Act arising from the relation between persons as set out hereabove. An exemption in terms of section 2(3) of the Companies Act may only be granted if there is sufficient evidence to conclude that the person acts independently from any related or inter-related persons.
Personal financial interest:
Section 75(5) read with section 76 of the Companies Act states that when a director has a personal financial interest in a matter to be voted on by the board or is aware that a related person has a personal interest in the matter then the director:
- must disclose the interest and the general nature of the interest prior to the meeting;
- must disclose material information in relation to the matter;
- may disclose observations or insights relating to the matter if requested by the other directors;
- must leave the meeting if present at the meeting once the disclosures in points 2 and 3 herein are made;
- must not take part in the consideration of the matter;
- once recused from the meeting the director is deemed present for purposes of constituting a quorum and is deemed absent for the purpose of the calculation of votes in order to pass a resolution; and
- must not execute documents in relation to the matter unless explicitly requested to do so by the board.
Section 76 of the Companies Act states that directors must exercise their powers and functions with a reasonable degree of care, skill and diligence and in the best interests of the company and are obliged to take reasonable steps to become informed on a matter. To ensure compliance with section 76 of the Companies Act the directors must comply with the disclosure requirements of section 75 of the Companies Act or had no material interest in the matter and had no reasonable basis to know that a related person had a personal financial interest in relation to the matter.
The requirements set out in section 76 of the Companies Act do not apply to a director in relation to a decision that affects all the directors of a company, a class of persons, of which the director may be a part of, unless the only members of the class are related or inter-related to the director, if one person holds all the beneficial interests of the issued securities of the company or if the director is the only director of the company.
In summary, a director who has a personal financial interest or is aware that a related person has a personal financial interest is required to disclose and thereafter recuse him/herself from the meeting. It is important to ensure your legal service provider is made aware and kept updated in terms of both the structure of your company as well as any personal relationships that may exist between juristic and natural persons within the corporate structure. Understanding who is a related person in terms of the Companies Act ensures resolutions are valid, directors act in accordance with the Companies Act and the best interests of the company are protected.
21 May 2019