AN UPDATE ON THE NEW PROVISIONS RELATING TO CONFLICTS OF INTEREST
One of the most significant changes introduced by The Companies Act 2006 (“the Act”) was the codified statutory statement of directors’ duties and the introduction of the concept of ‘enlightened shareholder value’. The latest provisions to come in to force (from 1 October 2008) under that part of the Act relate to conflicts of interest. All directors should ensure they are familiar with the changes to the common law position introduced under the new regime:
Duty to avoid conflicts of interest (Section 175)
Retaining the common law rule of no-conflict, this overarching duty prohibits a director from placing himself in a position where he has an interest which conflicts or could conflict with the interests of the company. This applies in particular to the exploitation of property, information or opportunity.
Where a conflict or a potential conflict arises the duty will not be infringed if the transaction or arrangement has been authorised. Prior to the Act such authorisation could only be given by the company’s members, but the new rule permits authorisation by the remaining ‘independent’ directors provided nothing in the company’s constitution (in the case of private companies) invalidates this.
Action Point: private companies incorporated prior to 1 October 2008 can only take advantage of the new board authorisation process if the company’s shareholders pass a resolution permitting this to happen.
Duty to declare interest in proposed traction or arrangment with the company (Section 177) Duty not to accept benefits from third parties (Section 176)
The existing fiduciary duty prohibiting directors from exploiting their position for personal benefit has been re-stated under the new statutory framework. The Act provides that the duty will not be infringed where the acceptance of a benefit cannot reasonably be regarded as giving rise to a conflict of interest.
In contrast to the section 175 approval process, conflicts arising by reason of a benefit having been accepted from a third party can only be authorised by the members of the company
Action Point: to avoid potentially unnecessary calls for shareholder approval, companies should consider revising their constitutions such that a minimum threshold would be employed. In this way, accepted benefits below a certain level (such as corporate hospitality) would not trigger a breach of duty.
Duty to Declare interest in proposed traction or arrangement with the company (Section 177)
The new statutory duty preserves the existing equitable rule whereby directors may not have an interest in a transaction or arrangement with the company unless that interest has been authorised by the company’s members. Under the Act, where a transaction or arrangement with the company is proposed, a director will need to declare the nature and extent of any interest (whether direct or indirect) in that proposal to his fellow directors.
The director need not necessarily be a party to the transaction for this duty to apply; indeed, the interests of another person (such as a family member or related company) may require the director to make a declaration.
Action Point: as the Act requires disclosure in advance, if in doubt make a disclosure or seek professional advice early to avoid difficulties at a later stage.