The law on conflicts of interest in relation to directors was codified in the Companies Act 2006. Under this legislation, directors must ensure they avoid situations where any interest that they have conflicts (or possibly conflicts) with the interests of the business.
Directors of a board have a duty to act objectively and make decisions that are based on the best interests of the business. Section 175 of the Act covers the duty to avoid a conflict of interest, and states that "a director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company". The duty applies in particular to the exploitation of any property, information or opportunity and it is immaterial whether or not the company could actually take advantage of this property, information or opportunity.
There is no definition of what will be classified as an interest or a conflict of interest. Section 175(7) does state that a conflict of interest covers a conflict of interest and a duty as well as a conflict of duties.
There are various examples of when a situation could arise in a conflict of interests:
- the director is either going to be a customer or supplier to the company;
- the director is a major shareholder of another company;
- the director represents a major shareholder of another company;
- the director is also a director of a competitor;
- the director is also an advisor of the company or a competitor;
- a director is able to make a profit from his directorship.
Avoiding a Conflict of Interest
If the director is concerned that there may be a conflict of interest they need to act immediately. There are two provisions under which a director would avoid a conflict, which are that the:
- the situation cannot reasonably be regarded as likely to give rise to a conflict; or
- the matter has been authorised by the directors.
Directors must ensure that they have obtained authorisation before a conflict of interest arises. In order for the authorisation to be permissible, one of the following conditions need to be met:
- the company is a private company and nothing in its constitution invalidates such authorisation; or
- the company is a public company and its constitution includes a provision enabling the directors to authorise the matter.
In order for the directors' authorisation to be valid, the authorisation must be agreed by vote by the directors that do not have an interest in the matter (and the quorum at the relevant meeting cannot include the director in question or any other interested director).
There is an added element here for the directors giving the authorisation that also needs to be considered. Another duty for directors is the "duty to promote the success of the company", which means that they must act in a way that they consider to be in good faith and most likely to promote the success of the company for the benefit of the members as a whole. Therefore, the non-interested directors have to ensure a matter is in the best interests of the company before they authorise it or they themselves could be guilty of breaching a duty.
Connected persons
It is not only the interests of the director themselves that need to be considered. Conflicts of interest can be both direct and indirect, which means that persons connected with the director can bring about a conflict of interest. The definition of connected persons that are family members was extended by the 2006 Act to include spouses and civil partners, partners that the director lives with, children or step children of the director (or their spouse or partner as previously defined) and their parents. Therefore, the director must consider the interests of those connected with him or her to determine if there is a possible conflict of interest.
Further Duties Relating to Conflicts of Interest
The directors need to ensure they comply with three other sections of the Act in relation to this area.
Benefits from third parties
Under section 176, a director has a "duty not to accept benefits from third parties". This is relevant where the benefit is either due to them being a director or doing (or not doing) anything as a director.
Interests in proposed transactions or arrangements
Under section 177, a director that is directly or indirectly interested in a proposed transaction or arrangement with the company must declare both the nature and extent of the interest to the other directors. The declaration has to be made before the company enters into the transaction or arrangement. Where the director is not aware of the transaction or arrangement in question then a declaration is not needed.
Interests in existing transactions or arrangements
Likewise, under section 182, where a director is directly or indirectly interested in a transaction or arrangement that has been entered into by the company, they must declare both the nature and extent of the interest to the other directors. The declaration has to be made as soon as is reasonably practicable. Again, where the director is not aware of the transaction or arrangement in question then a declaration is not needed.
Conclusion
Directors have to ensure that any possible conflict is dealt with appropriately and in a timely manner. Companies need to make sure they have processes in place to deal with the issues surrounding this issue including:
- implementing procedures to authorise conflicts;
- reviewing any possible conflicts;
- properly recording possible conflicts; and
- obtaining confirmation from any new directors about possible conflicts.
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This article is intended to be no more than a general guide and does not comprise legal advice. You are strongly advised to take legal advice before making or resisting any application to the Court.
