Conflict of Interest Issues With Company Directors

What may amount to a conflict of interest can vary from company to company dependent on the individual situation at the time, but generally conflict situations fall into 2 main categories - conflicts of interest that involve a transaction, and those conflicts of interest that do not.

We are experienced in advising in potential or actual conflict of interest situations. Involving us at an early stage can often result in avoiding a potentially much bigger issue or dispute arising which may cause great damage to the company.

Please do get in contact to discuss your situation and how we can help.

Duty to avoid a conflict of interest

The Companies Act 2006 outlines the responsibilities of a Director and in specifically relation to conflicts of interest; it outlines the three general duties a Director must observe. These are :-

• To refuse benefits from third parties - the Director must not accept benefits offered from third parties that may have an interest in the company in question, and to ensure that any offered are declared openly.

• To declare interests - a Director has a duty to declare any interests they may have with a third party supplier, arrangement or contract being undertaken by the company, or a transaction they have an interest in.

• To avoid conflicts of interest wherever possible - should a situation arise where a Director has by some means allowed a conflict of interest to occur in terms of a transaction or contract then unless the shareholders agree they can veto it altogether or, should it have already been processed and then discovered later, the Director has to declare any personal profit received.

Examples of potential conflict of interest

Common scenarios that might constitute a conflict of interest include :-

• Personal relationships - directors must avoid situations where their personal relationships with other individuals or entities could influence their decisions as directors. For example, a director who is married to a significant shareholder of a competing company might have a conflict of interest.

• Financial interests - directors should not have financial interests that could benefit them personally at the expense of the company. This includes situations where a director has a financial stake in a supplier or customer of the company.

• Competing interests - directors should not be involved in competing businesses that could harm the interests of the company they represent. For instance, a director who owns a competing company in the same industry might have a conflict of interest.

• Misuse of company property or information - directors must not use company property or information for personal gain or to benefit themselves or others. This includes situations where directors exploit company opportunities for their own personal benefit.

Transaction related conflict of interest

Surprisingly, a Director is not under a duty to avoid transactions that they may have an interest in, but they must declare the exact nature of the interest to the board where there may be a conflict of interest with the company's interests.

A failure to disclose an interest can be considered a breach of duty and can result in the transaction being stopped by the board.

The duty to disclose can be indirect also, such as where a person connected to the Director is involved such as a family member. It is usually safer for the Director to declare any potential connected persons interests also. Voting Directors are able to impose conditions upon any authorisation given to a director to go ahead.

In general, it is best practice that Directors make their board aware as soon as possible in full detail as to any potential conflicts of interest and interests they have in the transaction.

There are two scenarios covered by the Companies Act regarding a Director conflict of interest, as outlined above, a transaction already entered into and a transaction being entered into.

Transactions already entered into

If a Director has failed to recognise a potential conflict but then realise, they have a duty to disclose this interest and any profit or benefits to the company. Directors can reasonably be held accountable for matters which they ‘should have had an awareness of.

Understandably, this can be confusing for all involved and so for example if a ‘non acting Director’ found that another company of which they had a minor interest in had entered in to an agreement, it can be argued that they would not have known about the transaction, nor particularly should have known they have not failed in their duty.

Current Transactions

To not declare an interest in a transaction that is being entered into is a criminal offence and can result in prosecution. A Director has a responsibility to declare any interest or possible conflict of interest, direct or indirect before the transaction has been concluded.

How should the other directors respond when notified of a potential conflict?

When considering whether to authorise, each voting Director is required to base their decision on what they feel would benefit the company’s interests most.

The Director seeking authorisation needs to declare specific information in relation to the potential conflict of interest as fully as possible. In particular, information should include the specific nature of the conflict, and a full disclosure of history relating to the conflict.

The board voting on authorisation will have the ability to set conditions on which their authorisation is given and should these be violated, then the transaction is voidable.

Authorisation does not have to contain conditions, but it is often wise that upon authorising a conflict the board ensures that the Director that sought authorisation takes steps to avoid any unnecessarily uncomfortable situations for example meetings regarding the transaction, company or item relating to the conflict.