LML4806 - Past Question Papers (). with Answers 100% correct

Question Bongani has been a non-executive director of Apex (Pty) Ltd since 2012. He is also a director and sole shareholder of a management consultancy business, Infinity (Pty) Ltd. Apex (Pty) Ltd is undergoing a process of internal restructuring. Without knowing of Bongani’s involvement with Infinity (Pty) Ltd, one of the other directors of Apex (Pty) Ltd proposes to the board of directors of Apex (Pty) Ltd that Infinity (Pty) Ltd should be approached for advice on the recruitment of key staff. The board of directors of Apex (Pty) Ltd will be voting on this issue at the next board meeting which is scheduled for next week. (a) Bongani seeks your advice. He wants to know whether he must disclose his interest in this matter to the board of directors of Apex (Pty) Ltd and if so, what procedure he must adopt to do so. (8) Unisa’s comment These circumstances are regulated by section 75 of the Companies Act 71 of 2008 (‘the Act’). It provides that if a director has a personal financial interest in respect of a matter to be considered at a meeting of the board, the director must disclose the interest and its general nature before the matter is considered at the meeting. A personal financial interest is defined in section 1 of the Act as meaning a direct material interest of that person of a financial, monetary or economic nature, or to which a monetary value may be attributed. Bongani has a personal financial interest in this matter because Infinity (Pty) Ltd (of which Bongani is a director and sole shareholder) will benefit financially if Apex (Pty) Ltd appoints Infinity (Pty) Ltd to provide advice to it on the recruitment of staff. Therefore, Bongani must disclose his interest in the matter. 1 The procedure for Bongani to disclose his interest is as follows: 1. He must disclose his interest and its general nature to the board of directors before the matter is considered at the meeting. 2. He must disclose any material information relating to the matter and known by him. 3. He may disclose any observations or pertinent insights relating to the matter if requested to do so by other directors. 4. If present at the meeting, Bongani must leave the meeting after making any disclosure. 5. He must not take part in the consideration of the matter. 6. He must not execute any document on behalf of the company in relation to the matter unless specifically requested or directed to do so by the board. (b) Assume that Bongani does not disclose his interest. Explain whether the contract between Apex (Pty) Ltd and Infinity (Pty) Ltd will nonetheless be valid. (7) Unisa’s comment Section 75(7) of the Act provides that a board decision or a transaction or agreement approved by the board is valid despite any personal financial interest of a director or a person related to a director, only if – a) it was approved following disclosure of that interest in the manner contemplated in section 75 b) despite having been approved without disclosure of that interest, it – i) has subsequently been ratified by an ordinary resolution of the shareholders after disclosure of the interest or 2 ii) has been declared to be valid by a court in terms of section 75(8) of the Act. In terms of section 75(8) of the Act a court, on application by any interested person, may declare valid an agreement that had been approved by the board despite the failure of the director to satisfy the disclosure requirements of section 75. In Omar v Inhouse Technical Management (Pty) Ltd 2015 (3) SA 146 (WCC) the court affirmed that the effect of non-compliance with section 75(5) of the Companies Act is that the transaction or agreement entered into would be invalid unless it was ratified by the company’s shareholders or declared valid by a court. The contract will be valid only if it was approved following disclosure by Bongani of its general nature before the matter is considered at the meeting. However, even if there was no disclosure, the contract will still be valid if the shareholders of Apex (Pty) Ltd ratify it after the disclosure was made by Bongani to them. Furthermore, the contract will also be valid if a court declares it valid on an application by any interested person