The misnomer of a “personal financial interest”: director can be conflicted in more than just a financial sense

By Steven Stuart-Steer on 11 March 2016

The well followed case of the suspension of the former group CFO of PetroSA was recently decided upon in the Cape Town High Court, which case once again highlights the importance of having a practical grasp of the area of law concerning directors’ duties and in particular the duty to avoid a conflict of interest. The new Companies Act, 2008 (the “Act”) has partially codified certain of these directors’ duties in sections 75 and 76.

In particular section 75 of the Act (Director’s personal financial interests) provides the procedure to be followed in the case where a director has a personal financial interest in a matter to be heard and/or decided upon by the board of a company. However, the aforementioned sections are only a partial codification of the rich history of our common law. As such, the term “personal financial interest” as used in the Act is misleading if not understood correctly. 

A personal conflict scenario in our law is not limited to only an interest of a financial, monetary or economic nature, but extends back to the duty to act in the best interests of the company and to avoid a personal conflict of interests in the wide sense as developed by our courts over the years. A narrow view and strict reliance on the wording of the Act will not meet the common sense approach against which our courts will test such an argument. As such, a personal conflict includes for example a decision in a so-called “garden leave” scenario, whether such conflicted director is on suspension with or without full pay.

This case demonstrates once again that the underlying common law remains the bedrock of our company law and the provisions in the Act merely build upon this base and any arguments, company policy or procedures which forget this rich history could well fall upon it. 

Both a director and the company concerned should be mindful of the correct procedures for different scenarios for purposes of dismissal as opposed to suspension, for example, and should be vigilant when considering conflict situations, which can be over complicated if not approached in a practical and common sense manner. 

From a governance perspective, providing for the correct procedure in the company’s memorandum of incorporation can protect both the interests of the company concerned as well as provide comfort and clear guidelines to its directors.

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