ISAAC MUNYUKI
On Friday, October 5 2018, parliament gazetted the Companies and Other Business Entities Bill, 2018 (Bill) with amendments to the initial version of the Bill published earlier this year, for public comment. The Bill proposes far reaching changes to the current companies’ legislation, the Companies Act [Chapter 24:03]. This article, together with others that may follow, seeks to highlight only those matters contained in the Bill that are of material interest from a corporate governance point of view and to a certain extent corporate and deal structuring.
To promote corporate governance and to ensure that conflicted directors do not compromise board decisions, the Bill makes a proposition for directors to disclose their ‘personal financial interests’ in certain circumstances. While the concept of disclosure is not new in our law, the Bill goes a step further and expands on the director’s duty of disclosure making it more onerous than before. This is one of the most significant changes proposed by the Bill as it materially differs from current practice and prescribes serious consequences for non-compliance.
In terms of clause 57 of the Bill, a director of a company will be required to disclose any “personal financial interest” that the director or an associate (of that director) has in a matter to be considered by the board of a company. For purposes of clause 57 of the Bill, an associate includes, but is not limited to, a second company which is controlled by the director either alone or together with others. Without being exhaustive, the nature of ‘interest’ contemplated in clause 57 of the Bill is that which relates to matters of a financial, monetary or economic nature, or to which a monetary value may be attributed.
In practice and in appropriate cases, the application of clause 57 and other clauses connected thereto may serve to discourage if not to bar group companies from the practice of ‘mirror boards’. (Mirror boards are common in group companies where some or all of the directors of the holding company may sit as directors in the subsidiaries of that holding company.) For example, where a ‘mirror board’ exists, if the board of a subsidiary (Company A) is considering a matter and one (or more) of its directors is also a director of its holding company (Company B) and Company B has a disclosable interest in the matter, then the director will be obliged to comply with the requirements of clause 57 of the Bill, which include disclosing the disclosable interest and recusing himself from the discussions and from voting on matters at board meetings in which he has a disclosable interest.
Depending on the structure of the subsidiary company and its board composition, the recusal of conflicted directors may result in directors nominated by other shareholders, who could be minority shareholders, gaining control of the board of the company for purposes of considering and voting on the matters in respect of which the conflicted director would have recused himself from. For group companies that have other shareholders and have a mirror board in place, the application of clause 57 could pose challenges, particularly where there are group debt funding arrangements and decisions need to be taken regarding same. Although the directors nominated by the minorities remain bound by their fiduciary duties to the company, their take of the relevant matters could be justifiably different.
In addition to conflicts of interests relating to group companies discussed above, a director will also be required to disclose the financial interests of certain close relatives that he knows of, relating to a matter that is to be considered by the board.
Failure to disclose a financial interest will be a criminal offence, the proposed penalty being a fine not exceeding level fourteen or imprisonment for a period not exceeding two years or both such fine and imprisonment. A breach of this clause, in appropriate circumstances, could also result in the director being liable to the company in accordance with the common law principles relating to the breach of a fiduciary duty. Given the complexities associated with clause 57 this is a huge risk.
While the disclosure of financial interests contemplated in the Bill is welcome and in keeping with corporate law developments around the globe, the current wording of certain of the disclosure clauses, including the applicable definitions, leave room for varied interpretations which might lead to troubling conclusions. It is hoped that these will be resolved before the Bill is passed into law.
This is merely a high level analysis of the implications of the proposed changes to a director’s duty to disclose. More analysis will have to be done on a case by case basis. It is not clear when the Bill will come into force or if there will be substantial changes to its current wording. However, given the importance of these and other changes the Bill proposes to bring into law, directors and companies should closely follow the developments and acquaint themselves with the contents of the Bill to avoid being caught unawares.
Munyuki Isaac is a Johannesburg-based commercial lawyer and the views expressed in this article are his personal views and do not constitute legal advice. Feedback: isaacmunyuki@gmail.com
