Regulated Agreements under the OHADA Uniform Act on Commercial Companies and Economic interest Groups
Divine Afuba, LLM International Business Law, LSE, London
In the life of a commercial company, instances may arise whereby a shareholder, general manager or member of the board of directors uses his position to strike a deal that benefits him instead of the company, or otherwise acts in their own best interest, instead of the best interest of the company.
To prevent this from happening, the law has developed the concept of regulated agreements. The idea behind regulated agreements is the need to prevent, or at least to control, situations of conflicts of interest between company shareholders, directors/managers, board members, on the one hand, and the company, on the other hand. This is achieved through transparency in dealings with the company: company executives must disclose certain types of dealings with the companies they represent or work for, and obtain authorization from competent corporate organs in respect of such dealings.
In Cameroon, the applicable law in this area is the OHADA Uniform Act on commercial companies and the economic interest groups (the “Uniform Act” for short).
What the law states
Article 438 of the Uniform Act creates an obligation for the following types of contracts to be subject to the prior authorization of the board of directors of a public limited company (“société anonyme”):
– any agreement between a public limited company and one of its board members, general manager and deputy general manager;
– any agreement between the company and a shareholder holding at least 10% of the capital of the company;
– any agreement between the company and another company in which a board member, general manager, deputy general manager or a shareholder holds at least 10% of the capital of that other company or has an indirect interest or in which he deals with the company through a proxy (in French, “personne interposée”). According to some legal authors, an indirect interest exists where the director or shareholder in question is not the direct co-contracting party of the company, but obtains a benefit from the agreement (Alain Fénéon, “Droit des sociétés en Afrique: OHADA” LGDJ (2015) p. 339);
– any agreement between a company and another legal entity, if one of the board members, general manager, deputy general manager or shareholder holds at least 10% of the capital of the company or is the owner of the other legal entity or is a partner, general manager, deputy general manager, director or other company executive of the said legal entity.
The board member, general manager, deputy general manager or shareholder concerned is duty bound to inform the board of directors of the company of the existence of such an agreement. He should disclose his position and personal interest in the agreement by indicating his shareholding, his role and his personal relations with the other parties to the agreement and the extent to which he could personally benefit from the agreement (article 440 of the Uniform Act).
The chairperson of the board of directors or the general manager of the company notifies the auditor within a period of one (01) month of their signature, of any such agreement authorized by the board of directors, and submits them to the ordinary general meeting of shareholders for approval.
In addition, the company’s auditor prepares a special report on these agreements to the ordinary general meeting of shareholders, which shall then decide on the report and approve or disapprove the agreements authorized by the board of directors.
The shareholder concerned by the regulated agreement shall NOT take part in the vote on the said agreement and his shares shall not count in the calculation of the quorum and majority.
Article 439 of the Uniform Act provides an exception to the rule that the regulated agreements mentioned in point 2.1 above must be subject to board of directors’ prior authorization. It enacts that:
“An authorization is not required where the agreement relates to ordinary transactions carried out under ordinary conditions. Ordinary transactions are those carried out by a company, in a customary way, as part of its activities. Ordinary conditions are those that are applied for in similar agreements, not only by the company in question, but also by other companies in the same field.”
It is difficult to explain in detail what will be considered an “ordinary transaction” and “ordinary conditions” for the purposes of the law. They usually relate to agreements that the company usually enters into in the course of its business or to the normal and routine day-to-day operations consistent with the past practices and customs of the business. Suffice it to state here that these will be appreciated by the judge on a case-by-case basis.
It is considered by French courts, when interpreting similar business law provisions in French legislation that, conditions may be considered ordinary when they are usually practiced by the company in its dealings with third parties in such a way that the person concerned by the agreement (board member, etc.) does not derive from the transaction an advantage that he would not have had if he had been a supplier or customer of the company. Account must also be taken of the usages for similar agreements in other companies with the same activity.
The legal consequences of approved or disapproved regulated agreements
A regulated agreement, whether approved or disapproved, is binding on co-contractors and third parties and third parties, except in the case where such an agreement is cancelled for fraud.
Nevertheless, even in the absence of fraud, the law states that the harmful consequences of regulated agreements on the company may be attributed to the director, general manager, deputy general manager or the interested shareholder, and, as the case may be, to the other members of the board of directors. Such harmful consequences include losses suffered by the company and undue profits from the agreements (article 443 of the Uniform Act).
In addition, and without prejudice to the liability of the individual concerned, regulated agreements that are concluded without prior authorisation of the board of directors may be cancelled if they have had harmful consequences on the company (article 444 of the Uniform Act).
Legal action for the cancellation of the regulated agreement shall be time barred after three years from the date of the agreement. But if the agreement was concealed, the three (03) years time limit begins to run from the date the agreement was revealed. The action for cancellation may be commenced by the management of the company or by any shareholder acting individually (articles 445 and 446 of the Uniform Act).
Note however that the invalidity of the regulated agreement may be covered/remedied by a special vote of the ordinary general meeting of shareholders, acting upon presentation of the auditor’s special report that lays down the circumstances explaining why the authorization procedure was not followed (article 447 of the Uniform Act).
In conclusion, in case of any doubt as to whether or not an agreement is a regulated agreement that comes within the exception provided in article 439 of the Uniform Act, it is recommended, as a precautionary measure, that such agreement be subject to prior authorization of the board of directors, and approval of the shareholders.