legal updates
Wednesday, 13 May 2009
authorising directors’ conflicts of interest and declaration of interests
authorisation of conflicts
A director of a company must not, without the company's consent, place himself in a position where there is a conflict, or possible conflict, between the duties he owes the company and either his personal interests or other duties he owes to a third party.
Before October 2008, if a director found himself in a conflict situation only the shareholders had the power to sanction it. Under the Companies Act 2006, provided a conflict has been authorised by the directors, it will not require approval by shareholders.
For private companies existing prior to 1 October 2008, directors will not automatically be given the right to authorise conflicts. A company will either need to amend its Articles of Association to allow for director authorisation, or it can ask its shareholders to pass an ordinary resolution to the same end. Directors will then have the power to authorise conflicts of interest, provided that the conflicted director does not vote and is not counted in the quorum.
An example of such a conflict would be where a director is on the board of, is a significant shareholder in, or is himself, a supplier to or customer of the company.
The primary benefit of board authorisation of conflicts is that it allows for better use of management time; the board can just get on with running the company.
Declaration of interests
As far as conflicts of interest arising in relation to transactions or arrangements with the company are concerned, these do not need to be authorised by the directors or the shareholders. Instead directors must declare their interests. Where an appropriate declaration is not made the company can revoke the contract and the director can be asked to account for the profits he made out of it. Failure to disclose an interest in an existing transaction or arrangement is a criminal offence which can lead to an unlimited fine.
Main action points
- For companies existing prior to 1 October 2008 who want to allow for board authorisation of conflicts, the neatest solution will be to change the articles of association so that a sensible code of practice of dealing with conflicts can be set out and the articles brought up to date. This is also worth doing for companies incorporated after that date to set out a coherent policy for dealing with conflicts.
- It is useful to have circulated specific forms of notice to directors for them to use when notifying of interests and to have drafted forms of wording to be used in board minutes when dealing with interests ready for use when necessary.
If you would like further information or for CCW to provide a package dealing with these issues, please contact Pamela Abbott or David Wylie.