The conflict on interest – under the spotlight

A recent case from the Commercial Court in Gauteng was fascinating because it illustrates the far-reaching effects of conflicts of interest in companies and why they should be avoided.

Facts

It involved an application in terms of section 75(8) of the Companies Act 71 of 2008 (the Act) to declare valid the terms of the main lease agreement. A subsequent amendment to it purportedly concluded between Atlas Park Holdings (Pty) Ltd, which is the applicant (as the lessor) and Tailifts South Africa (Pty) Ltd, which is the respondent (as lessee).

The section 75(8) application is brought principally because Mr Warwick van Breda, held directorships not only in the respondent but also in the applicant at the time the lease agreements were allegedly signed. He was also a director of certain upstream companies of the applicant when the lease agreements were concluded.

It was accepted that Mr van Breda had:

a direct financial interest in the lease agreements because of his directorship in the applicant;contends that any financial interest he may have had in any of the upstream entities was indirect.

The law

Section 75(5) (e) and (f) provide that a director in such situations.

"(e) must not take part in the consideration of the matter ...;

(f) must not execute any document on behalf of the company in relation to the matter unless specifically requested or directed to do so by the board."

Section 75(7) reads:

"A decision by the board or a transaction or agreement approved by the board, or by the company as contemplated in subsection (3), is valid despite any personal financial interest of a director or person related to a director only if-

(a) it was approved following disclosure of that interest in the manner contemplated in this section

(b) despite having been approved without disclosure of that interest, it

(i) has subsequently been ratified by an ordinary resolution of the shareholders following disclosure of that interest; or

(ii) The board minute also authorised van Breda to sign any subsequent amendments to the agreement and recorded that the board ratified all actions van Breda may have already taken in relation to the lease in question

(iiI) has subsequently been declared valid by a court in terms of subsection (8)."

It is common cause that neither the purported board resolution nor the lease transaction or agreements were approved or subsequently ratified.

van Breda had a personal financial interest or knew that a related person (as defined in section 1 and extended by section 75(1)(b)) had a personal financial interest in the transaction. Accordingly, the agreements and the board resolution can only be binding on the respondent if the court, exercising its discretion, declares in section 75(8).

A significant legal issue raised by the applicant is that a related person in the context of the present case is limited to a company in which the director is also a director.

Conclusion

Conflict of interest is an aspect of the director's fiduciary duty of loyalty owed to the company. It embraces self-dealing, matters of executive compensation, and, of course, the taking of corporate or shareholder property, including the appropriation of a corporate opportunity. Contact us at SchoemanLaw https://www.schoemanlaw.co.za for assistance and advice on implementing a sound corporate governance structure.

GAUTENG DIVISION, JOHANNESBURG (Commercial Court) - 28817/2020 : ATLAS PARK HOLDINGS (PTY) LTD v TAILIFTS SOUTH AFRICA (PTY) LTD