What is a director’s conflict of interest? The Companies Act 2006 introduced a number of duties to which all company directors are subject – known as fiduciary duties. A director’s conflict of interest refers to a situation in which a director’s personal interests (or the interests of other persons to whom the director owes duties) are at odds with the duties owed to the company.
The statutory duties are:
- to avoid conflicts of interest;
- not to accept benefits from third parties;
- to declare interest in a proposed transaction or arrangement (transactional conflicts); and
- to declare interest in an existing transaction or arrangement
Duty to avoid a director’s conflict of interest
A director is required to avoid any situation in which he/she has, or may have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.
For example, where a company proposes to enter into an agreement with another company of which the director is a majority shareholder. Or, where a director wishes to personally take up an opportunity that has been offered to, but declined by the company.
Key features:
- extends to the exploitation of any property, information or opportunity even if the company could not have taken advantage of such property, information or opportunity itself;
- applies to a person who ceases to be a director with regards to the exploitation of any property, information or opportunity of which they became aware whilst they were still a director; and
- there is an exception in situations which cannot reasonably be regarded as likely to give rise to a conflict of interest. For example, a small shareholding (less than one per cent) held by a director of a company which is a key supplier may not be caught. This should be assessed on a case-by-case basis.
Directors may be permitted by the shareholders or by the directors (subject to what the company’s constitution provides) to participate in situations which may give rise to a conflict of interest.
Any such authorisation given by the non-conflicted directors is only effective if the conflicted director is excluded from the voting and quorum requirements.
Duty not to accept benefits from a third party
A director must not accept a benefit from a third party conferred by reason of doing (or not doing) anything as a director.
Key features:
- Includes benefits of any kind, including non-financial benefits.
- Does not relate to benefits received from group companies or a company the director’s services are supplied.
- Benefits are not defined and so this duty is open to a potentially wide interpretation. There is no specific financial threshold below which benefits would not be caught. However, there is a safety net for directors in relation to benefits which cannot reasonably be regarded as likely to give rise to a conflict of interest. Again, this should be assessed on a case-by-case basis.
- Continues to apply to a person who ceases to be a director with regards to benefits conferred by reason of things done or omitted whilst in office.
- Unlike the duty to avoid situational conflicts, the directors cannot be empowered to authorise benefits which would otherwise fall foul of this duty; such authorisation can only be given by the shareholders.
Duty to declare conflicts
There are separate duties, relating to proposed and existing transactions and arrangements, namely:
- A director who is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, must declare the nature and extent of their interest to the other directors.
- Where a director of the company is in any way, directly or indirectly, interested in a transaction or arrangement that has been entered into by the company, they must declare the nature and extent of their interest to the other directors.
Key features:
- In each case the director is required to declare the “nature and extent” of his or her interest, and there is a requirement to update a declaration as necessary to ensure that it remains accurate and complete.
- A director is only required to declare an interest to the extent that he or she is aware; but includes matters of which he or she ought reasonably to be aware.
- A director does not need declare an interest if it cannot reasonably be regarded as likely to give rise to a conflict of interests; to the extent that the other directors are aware of it (includes matters of which they ought reasonably to be aware); or to the extent that it concerns the terms of his service contract.
- Any declaration can be made at a board meeting or by written notice. If made by written notice it is deemed to form part of the proceedings at the next board meeting and the minutes of that meeting must reflect this fact.
- In the case of a proposed transaction or arrangement, the declaration must be made before that transaction or arrangement is entered into. In relation to an existing transaction or arrangement, the requirement is to make such disclosure as soon as is reasonably practicable.
- Any declarations required must be made to the non-conflicted directors. If the company has a sole director, a declaration is not required.
- Having made the declaration, the Companies Act does not require any further approvals to be obtained. However, the company must also comply with any additional requirements set out in the company’s articles of association.
Consequences of a breach
In relation to the duty to avoid situational conflicts, duty not to accept benefits from third parties and duty to declare interest in a proposed transaction or arrangement, a breach will give rise to civil remedies. Depending upon the circumstances of the breach, this may include compensation, damages, an account of profits, restoration of property or rescission of a contract.
A breach of the duty to declare an interest in an existing transaction or arrangement will constitute a criminal offence, punishable by a fine.
However, if a director fails to declare an interest in a proposed transaction with the company and, following that transaction being entered into, fails to declare their on-going interest in that transaction, they will be in breach of both of these duties and so potentially expose themselves to civil and criminal liability.
What steps should be taken in order to comply with their duties and avoid a director’s conflict of interest?
- Directors should ensure that they keep themselves informed so as to be able to identify potential situations of conflicts and obtain the necessary authorisations/make the necessary declarations in advance, as required by statute. This is particularly important for non-executive directors who are not likely to be involved in day to day management.
- Where the board/shareholders propose to authorise a particular conflict, consideration should be given as to the scope of the approval and, in particular, whether such approval is to be given subject to any limitations or conditions, and taking into account any specific provisions in the articles.
- Consider whether it is appropriate to put any guidelines in place regarding the acceptance of benefits by directors. Such guidelines may need shareholder approval.
For more information about a Director’s Conflict of Interest, contact our Corporate and Commercial Legal Team
SO Legal Solicitors Eastbourne – 01323 407555
SO Legal Solicitors Brighton & Hove – 01273 069920
SO Legal Solicitors Hastings – 01424 709050
SO Legal Solicitors Uckfield – 01825 729840
SO Legal Solicitors Notting Hill – 0203 9677700