Ccompanies Act on conflict of interest

ONE cannot talk of good corporate governance and overlook conflict of interest, especially the need to avoid it or its full disclosure. In this article I look at what the Companies and Other Business Entities Act (Chapter 24:31) or “COBE Act” or “the Act” say on conflict of interest.

Duty of loyalty

According to section 55( 2) a manager or controlling member of a private business corporation and a director, officer or controlling member of a company has a duty to act with loyalty to that registered business entity and, in the case of a company, towards any subsidiary of that company.

In terms of section 55 ( 3) the duty of loyalty referred to in subsection ( 2) includes but is not limited to a duty—

◆ not to use property of the registered business entity for his or her personal benefit or for the benefit another person other than the entity;

◆ not to disclose confidential information of the entity or to use confidential information of the entity for his or her personal benefit or for the benefit another person other than the entity;

◆ to communicate to the board or members (as the case may be) at the earliest practicable opportunity any information that comes to his or her attention

◆ not to abuse the person’s position in the registered business entity for his or her personal benefit, or for the benefit another person other than the entity;

◆ not to take business opportunities of the registered business entity for his or her personal benefit, or for the benefit another person other than the entity;

◆ not to compete in business with the registered business entity (including competing individually or as a manager of a private business corporation, or a director or officer of a company which competes in business with the registered business entity of which he or she is manager, director or officer);

◆ not to accept a material benefit from a third party for doing or not doing anything,

◆ to never knowingly cause harm to the entity;

◆ to serve only the registered business entity’s interest in all transactions involving the entity in which the Transactions involving conflict of interest

According to section 56( 4) at any time, a director may disclose any personal financial interest in advance, by delivering to the board, or shareholders in the case of a company contemplated in section 56( 3), a notice in writing setting out the nature and extent of that interest.

Personal financial interest, according to section 56( 1) means a direct material interest of that person, of a financial, monetary or economic nature, or to which a monetary value may be attributed.

According to section 56( 5) a person is deemed to have a personal financial interest in an act or transaction with the registered business entity if–

◆ That person or a near relative or other associate of that person is a party to the act or transaction or has a material financial interest in the act or transaction; ◆ That person has a financial or family member relationship with a party to the act or transaction, or with a person who has a material financial interest in the act or transaction, that could reasonably be expected to affect that person’s judgment adversely to the registered business entity.

Section 56( 6) states that a person who enters into a contract or transaction with the registered business entity in which that person has a personal interest, has not violated the duty of loyalty if the contract or transaction is authorised in advance or ratified after the fact by either–

◆ A majority of the votes of members of the registered business entity who do not have a personal interest in the act or transaction;

◆ A majority of the board of directors who do not have such personal interest, in the case of a company;

◆ All members in a case where there are no members who do not have such personal interest

Provided that in all such cases all material facts regarding the personal interest have been disclosed or are known to the authorising persons, and the conflicted person did not participate in their decision.

According to section 56( 7) any person who contravenes subsection ( 3) shall be guilty of an offence and be liable to a fine not exceeding level fourteen or to imprisonment for a period not exceeding two years, or both.

Duty to disclose conflict of interest This is covered in section 57 of the Act. If a person with the duty of loyalty has a personal financial interest in respect of a matter to be considered at a meeting of the board of the company or meeting of the members of the private business corporation, or knows that an associate has a personal financial interest in the matter, the person—

◆ Must disclose the interest and its general nature before the matter is considered at the meeting;

◆ Must disclose to the meeting any material information relating to the matter, and known to the person;

◆ May disclose any observations or pertinent insights relating to the matter if requested to do so by the other persons;

◆ If present at the meeting, must leave the meeting immediately after making any disclosure

◆ Must not take part in the consideration of the matter

◆ While absent from the meeting in terms of this subsection is to be regarded as being present at the meeting for the purpose of determining whether sufficient directors or members are present to constitute the meeting and is not to be regarded as being present at the meeting for the purpose of determining whether a resolution has sufficient support to be adopted.

◆ Must not execute any document on behalf of the registered business entity in relation to the matter unless specifically requested or directed to do so by the board or meeting of members.

Conclusion

Conflict of interest situations are encountered in business but should be dealt with in terms of the law.

Disclaimer

This simplified article is for general information purposes only and does not constitute the writer’s professional advice.

◆ Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), MBA(EBS, Heriot- Watt, UK) is a practising commercial lawyer and conveyancer, chartered accountant, corporate rescue practitioner, registered tax accountant, consultant in deal structuring and business valuer. He is also a director with Investacare International (Private) Limited. He writes in his personal capacity. He can be contacted on +263 772 246 900 or gohofisi@gmail.com