A director of a company who has a personal financial interest, or knows that a related person has a personal financial interest, in a matter to be considered at a board meeting must disclose that interest and any other material information relating to the matter before it is discussed at the board meeting (section 75 of the Companies Act 2008).
A ‘personal financial interest’ is a direct material interest of a financial, monetary or economic nature, or to which a monetary value may be attributed.
The director must disclose their interest, any material information they possess and, if asked, any useful insights. If the director makes the disclosure at the meeting, the director must leave the meeting immediately after making the disclosure, must not take part in the consideration of the matter and may not vote on it. The director will however be counted for quorum purposes as being present.
In terms of section 75(7), a decision approved by the board of directors is valid if it was approved after the disclosure of a personal financial interest in accordance with the section. Alternatively, if there was no disclosure, the decision will be valid if it is subsequently ratified by an ordinary resolution of the shareholders or declared valid by a court.
The general rule is that a director cannot vote on a matter in which he or she is an interested party. This rule applies to all companies with the exception of companies that only have one director who is also the sole shareholder.
There are some aspects of this rule that have not been clearly addressed in our law. For example, what happens if all of the directors on the board have disclosed a personal financial interest in the same matter? In this scenario, every director is conflicted and their recusal would result in there being no director to pass the resolution. This is a gap in the law and it is unfortunate that our courts have not yet had the opportunity to provide guidance on how to approach this.
A practical approach is to pass a shareholder resolution at a meeting convened by the board approving the matter where the shareholders acknowledge the directors’ disclosure and the board’s inability to act. The shareholders resolution must be passed before the board resolution relating to the personal financial interest is passed.
We note that section 75 does not provide a remedy in the form of shareholder approval. Further, a board that allows a conflicted director to vote on a matter where that director has disclosed their conflict may have contravened section 75 and risks prejudicing the company. However, directors are responsible for the day to day management of the company, and must always act in the best interests of the company. If the decision is in the best interests of the company, and shareholders approve the resolution, there is no reason why shareholder approval should not remedy the defect.