Mthimunye Bakoro (“the Applicant”) brought an urgent application to the Western Cape High Court seeking to challenge the lawfulness of certain meetings of the board of directors of Petroleum Oil and Gas Corporation of South Africa (SOC) Ltd (“PetroSA”) and the decision and resolutions passed at such meetings. The Applicant was an executive director of the PetroSA and its chief financial officer.

Summary

In 2014, the board of directors of PetroSA (“the Board”) realised that PetroSA would post a substantial loss of several billion rand at the end of the 2015 financial year. Due to the financial well being of PetroSA falling within the Applicant’s duties and responsibilities as PetroSA’s chief financial officer, the Board formed the prima facie view that the poor financial performance was attributable to the Applicant. The Board also held the prima facie view that the Applicant had committed acts of serious misconduct.

On the basis of the above views held by the Board, PetroSA determined that an investigation into the causes of the substantial losses and the poor performance generally was required, together with the Applicant’s potential role in the poor performance. The Board held meetings on 18 June 2015 and 13 July 2015, where it was resolved to suspend the Applicant pending the outcome of such investigation.

The Board comprised of eight non-executive directors and two executive directors, namely the Applicant and the group chief executive officer (“GCEO”). The Applicant contended that because the executive directors of the Board were not notified nor invited to the meeting held on 18 June 2015, PetroSA contravened fundamental principles of corporate governance. Thus the meeting should be declared unlawful and the decisions and resolutions taken and passed at the meeting on 18 June 2015 declared invalid and of no force and effect.

A further meeting was held on 13 July 2015. The primary purpose of this meeting was to reconsider the decisions that were taken at the meeting of 18 June 2015 to suspend the Applicant and the GCEO. The meeting was attended by all the directors of PetroSA, albeit the Applicant and the GCEO were excused from the meeting after the Applicant was given an opportunity to make representations.

As a point in limine, the respondents submitted to the court that it did not have the necessary jurisdiction to consider the relief sought by the Applicant in that the dispute, although framed as a challenge of the validity of the meetings and resolutions of the Board, was substantially related to an employment issue.

The in limine point was rejected by the court on the basis that the present dispute, being the lawfulness of the meetings and resolutions of the Board, fell firmly within the domain of the Companies Act 71 of 2008 (“the Act”), and if not, the common law regulating the duties and responsibilities of directors. The court held that the interpretation of certain provisions of the Act, specifically section 75, and in the alternative, the relevant common law, held the key to the resolution of the dispute.

In the Applicant’s view, the executive directors were excluded from the meeting held on 13 July 2015 on the basis of a perceived conflict of interest without any proper determination or debate as to whether they were conflicted on the matters for consideration for the meeting. Much of the debate turned on the justification of the exclusion contained in section 75(5) of the Companies Act 71 of 2008 (“the Act”), read together with the articles of association of PetroSA.

Section 75(5)(d) and (e) of the Act deal with when a director must not be present at or participate in any deliberation by a board of a matter in which that director has a personal interest. The Applicant contended that she was permitted to make representations as to the perceived conflict of interest as referred to by the chairperson of the Board. The Applicant’s representations regarding the perceived conflict of interest, together with the objection of the short notice, failure to provide requested information were dismissed out of hand and then she was obliged to leave the meeting.

In the context of suspension of the Applicant, section 71(3) and (4) of the Act deals with the removal of directors and provides that the director concerned must be given notice of the meeting and a reasonable opportunity to make representations to the board before the resolution to remove the director is put to the vote.

Should the Applicant’s interpretation of the relevant sections be correct, a board of a company, in dealing with an executive director against whom serious allegations are made, would not be able to deliberate without the participation of the director when considering his or her suspension as an executive, whereas, if removal was contemplated, it could do so in terms of section 71(3) of the Act. The court found that this interpretation would place an extremely strict construction upon the meaning of personal interest as to permit full participation by the director who is the very subject matter of the deliberations of the board. The court held the view that this construction goes against the purpose of section 75.

The Court held that there was a manifest conflict of interest, and that it could not be contended with any measure of justification that, when the decision of the board concerns a preliminary suspension of an employee, who happens to be a director, that director does not have a conflict of interest in the deliberations which have to be undertaken by the board. The Court therefore found that given the breadth of the definition of personal financial interest, the Applicant would not, by virtue of the provisions of the Act be permitted to participate in meetings regarding her suspension, and the application was dismissed with costs.

The legal principles surrounding the validity of meetings held and resolutions passed by a board of directors to the exclusion of an executive director were clarified and confirmed in this judgment.