When must a director disclose a financial interest?

08 February 2022 504
Being a director in a company does not necessarily stop you from holding shares in other companies. However, should your company transact with another company in which you have a shareholding stake and from which you could potentially benefit, it becomes important that you disclose such financial interest to your co-directors, even if you can’t influence the transaction.

As a director of a company, you have certain fiduciary responsibilities towards the company, which includes disclosing financial interests that may have a bearing on your position as director. In this regard section 75 of the Companies Act 71 of 2008 (“Act”) specifically obligates directors of a company to inform their co-directors when they have a financial interest in any transaction or decisions that the board of directors are privy to. Not only does this provision ensure transparency as a key element of any resolution the board of directors take, but it also establishes guidelines for directors to fulfill their fiduciary duty and uphold good practices in their corporate role. The Act even requires that a director disclose an instance where a person related to the director, such as a family member, has a personal financial interest in the topic or decision at hand.  

But what exactly is a “personal financial interest”? The Act indicates that a personal financial interest is any direct material interest (either financial, monetary or economic) where a monetary value can be attributed to the interest the director receives or could receive. The Act excludes interests that a director may hold in a unit trust or collective investment scheme, unless that director has direct control over that fund or decisions. 

So, assuming there is a potential personal financial interest, when and how must the conflicted director disclose this personal financial interest to his co-directors? The Act determines that a director with a personal financial interest, or a director that is related to someone with a financial interest, must disclose this fact to the other directors during the meeting where the specific matter relating to the personal financial interest is discussed. This disclosure can either be in writing or verbal, and must include the material information relevant to the topic at hand. After the director has disclosed his financial interest, he must recuse himself from the discussion before the board discusses the matter. The Act also makes it clear that a conflicted director will not be allowed to vote on any decision relating to the topic or transaction that he, or someone related to him, has a personal financial interest in. 

Failing to properly disclose such a personal financial interest, could result in the resolution taken by the board of directors, being regarded as invalid. The Act does however give the board of directors and the shareholders of the company the right to ratify the subsequent delayed proper disclosure by either one of two ways. The first option is that the shareholders ratify the disclosure of the director’s personal financial interest in retrospect. The second option is that a competent court of law can declare the resolution as valid. 

As a director, however, it is best not to create such issues and risk breaching your fiduciary duties and rather ensure that any personal financial interest is disclosed. If you are unsure whether an interest should be disclosed, you should obtain legal advice and so err on the side of caution.