This blog was co-authored by Adrienne Hendricks, Candidate Attorney.
In an October 2024 High Court judgment, the provision of the Companies Act regulating decisions taken by the board, other than at a board meeting, was interpreted to align with the prohibition on directors with conflicting personal financial interests from participating in board meetings.
Two out of four directors were signatories to a round-robin resolution purporting to authorise the institution of an application at court.
One of the issues raised by the applicant director, who had a personal financial interest in the outcome, was that the resolution was not taken at a properly constituted, quorate meeting of the board and the resolution did not carry with more than a 50% majority as required by the company’s memorandum of incorporation (MOI).
Section 74(1) of the Act requires a round-robin resolution (the making of decisions by the board other than at a meeting) to be adopted by “written consent of a majority of the directors” and each director should be notified of the matter to be decided.
Clause 46 of the company’s MOI requires that a round-robin resolution be “signed by the requisite majority…”. The court found that a decision taken by round-robin resolution does not require a meeting, let alone a quorate one, to be valid.
The court held that the “requisite majority” must be interpreted with reference to section 75(5)(d) of the Act which prohibits directors from being in attendance at meetings in which matters concerning their personal financial interests are being considered. Furthermore, section 75(5)(d) read with section 75(5)(f) of the Act prohibits directors from voting on matters in which they have a personal financial interest. Directors with a personal financial interest are not to be considered present at a meeting for the purpose of “determining whether a resolution has sufficient support to be adopted”. These provisions relate expressly to formal meetings, but the court reasoned that the purpose of these sections (which is to encourage directors to serve the company’s interests rather than their own financial interests) would be served if they applied to all actions of the board, including round-robin decisions.
Accordingly, the court interpreted “requisite majority” to mean the majority required for decisions taken at formal meetings. The calculation of the majority is subject to the restrictions on directors with personal financial interests in matters to be considered by the board. Therefore, the court excluded the director with a financial interest in the matters from the calculation of the “requisite majority”. Three out of four directors were thus eligible to vote and two voted in favour of the resolution. Therefore, the resolution carried with more than a simple majority.
The court’s interpretation of sections 74 and 75 is logical and aligns with the fact that a company’s MOI may alter the requirements set out in section 74 of the Act. This judgment, does not, however, deal with the frequently encountered issue in practice where the majority or entire board of a company is conflicted, or where a company’s MOI does not alter the provisions of section 74. The question then remains how the “majority” must be determined where all or the majority of directors have conflicting financial interests in the context of round-robin board resolutions. It would be beneficial for the legislature to intervene and address the practical issues and problems encountered in practice relating to sections 74 and 75 of the Act (as also alluded to by the court in this judgment).
The full judgement can be accessed here: Mkhize and Others v Kwandile Resources (Pty) Ltd (2023/005460) [2024] ZAGPJHC 1013 (7 October 2024) (saflii.org)