In the past week, news media attention was again devoted to the case by the DPP against TDC et al. Generally, front page attention was given to the testimony of senior politicians and public officials.
In particular, Mr Jacob Nkate was reported as having testified that “he could not see any conflict of interest”, apparently when it was put to him by the State that “the Debswana managing director was running a project that was in conflict with Debswana’s” (The Botswana Gazette, 21-27 April 2010, at p. 2).
That choice of words is really unfortunate. Some will think that this sorry saga gives Nkate a foothold on eternity, but for the wrong reasons. I am not really concerned with the merits of Nkate’s testimony, the matter being sub judice; rather, it is what should be understood by the public if it is said there is no conflict of interest that preoccupies me. In my view, much of the confusion that is likely to creep into people’s minds flows from the use of the words in different contexts.
Any clarity can be achieved if one first defines the sense in which one is using the words.
In the context in which these words are understood in company law and in this article, they are used to address the obligations of a director when he or she has a personal or financial interest in an entity with which the company may do business?
The law holds directors and officers of the company to certain rules or standards of conduct. The law sums up these rules or standards of conduct by saying that a director or officer stands in a “fiduciary” capacity towards the company. One of the rules is the director’s duty to avoid conflicts of interest. I will briefly say something about each of the different aspects of the so-called “no conflict rule”. The aspects can be divided into four: transactions with the company; competing with the company; use of corporate assets and information; and opportunities to make secret profits.
The first aspect of the rule, based on trust principles, is fairly straightforward: no one having a fiduciary duty to discharge shall be allowed to enter into an engagement in which he or she has or can have a personal interest conflicting, or which may possibly conflict, with the interests of those whom he or she is bound to protect. These words were stated by the English courts as far back as 1854 and typify the common law approach in Botswana which essentially is based on the idea that the company is entitled to the unbiased and independent judgment of its directors unclouded by any personal interest. As a general rule, however, since the company is the beneficiary of this duty, the company should be entitled to waive it.
As a consequence, in some English derived company law systems, including Botswana, South Africa, Zimbabwe, Namibia, Australia, New Zealand and Britain, it is open to provide in the company’s constitution or articles for a modification of the duty so that directors may transact with the company, usually with the terms that any interest in the transaction is declared.
For example, section 135 of our Companies Act 2003 (Act No 32 of 2004), requires disclosure of interest. As well, in countries with an English based company law tradition, it is open to directors to obtain shareholder approval in general meetings or shareholder ratification of directors’ actions after the event.
The 2003 Companies Act, under s 133, requires the approval of the company, by resolution, after full disclosure of all material facts, including the nature and extent of any interest of the director. The 2003 Act came into effect only on 1 July 2007 and the transactions between Debswana/TDC and Government were concluded prior to this date. Accordingly, the provisions of the Companies Act do not apply to these transactions.
However, there is no doubt that the common law rule that no one having a fiduciary duty to discharge can enter into a transaction in which he or she has a personal interest conflicting or which may possibly conflict with the interests of the company applies. The next aspect of the no-conflict rule is the director’s duty not to compete with the company.
Historically, the common law does not, however, prevent a person serving as a director from himself or herself competing with the company provided that he or she does not take steps to harm the company. The ability to compete can be restricted by the company either in its constitution or articles or, more commonly, by way of the managing director’s service contract.
Most modern service contracts do stipulate the time that a managing director or chief executive officer is supposed to devote to the company’s affairs.
If required to devote all his or her attention to the company, then by implication the managing director or chief executive officer will be in breach of contract if he or she is also competing with the company either directly or indirectly.
Nevertheless, it is also quite common for the service contract expressly to permit the director to compete, providing that does not fall foul of any regulations or restrictions. The third aspect of the rule is that a director may not profit from his or her position and if that happens, the director must account to the company for that profit, whether or not the company would itself have been able to obtain a profit.
This company law rule is also originates in trust law. A trustee, let us say, takes a renewal of a lease which he or she had previously held for the benefit of a child.
The trustee will be held liable to account for the profits he or she has made even though on the facts it was clear that the infant would not have obtained a lease for his or her own benefit. The obligation is no less for managing directors and senior officers. The first of the specific aspects referred to above is the use of corporate assets.
It is clear that where physical assets or cash belonging to the company are used by directors to make a secret profit, the company can recover the assets itself and also the profit that has been made either by way of an accounting of profits or by using the concept of constructive trust. The most interesting question here is whether information can be regarded as the property of the company. There are many decisions where courts have held that information could be property. For example, it has been held by the English Court of Appeal that since a chairman’s knowledge of the sources of finance from property development was acquired in the course of administering the company business, that knowledge was an asset which belonged to the company. The application of information as property often seems to depend on the person behind the classification. Let us suppose the court is concerned with the prosecution of a theft in relation to the appropriation of a university’s examinations paper.
The question may be whether the examination paper constitutes property (for the purposes of the charge). Some courts have found that the accused had deprived the university the confidentiality of the information rather than the receipt of the paper.
It is all about what is in the examinations paper or, in other terms, that what the university has been deprived of is confidentiality and this is a right over property rather than the property itself.
But other courts have reached the opposite conclusion and have held that there is “no reason why confidential information that has been gathered through the expenditure of time, effort and money by a commercial enterprise for the purpose of its business should not be regarded as property and hence entitled to the protection of the criminal law.”
Thus there are cogent reasons as to why Debswana should seek redress from the courts. Lastly, a director must not contract with a third party if to do so might deprive the company of an opportunity to make a profit or acquire property.
Our law says that where a director might become aware of an opportunity to acquire a valuable asset through his or her position as such, to acquire it for personal use if the company might be interested in obtaining it would be in breach of fiduciary obligations. Let us suppose Debswana were to sue for recovery of the plot on the western side of the A1 road in Gaborone on one’s way to Serowe.
The High Court would apply the principle of corporate opportunity, and find that the acquisition of the plot was in trust for Debswana. In other terms, the Court would treat Debswana as the beneficial owner. Let us suppose, further, that a director had already disposed of the plot. The High Court might require him or her to deliver up any profit made on the transaction to Debswana.
The principle would apply even where, as happened in the Supreme Court of Canada in 1973, directors used information available to them as the directors for the purpose of gaining a benefit for a new company that they formed after resigning their positions. Michael Mothobi is director of the Botswana Telecoms Corporation and the Civil Aviation Authority of Botswana.
He also sits on the National Committee on Trade Policy and Negotiations.
