DIRECTOR CONFLICT OF INTEREST

How should the Board respond to a conflict of interest?



A Director has a duty to avoid conflicts of interest wherever possible. The other directors can be caught unaware when transactions have proceeded without their reasonable knowledge. On these occasions the failure to declare an interest can result in a transaction being voided and so it becomes the board’s decision as to if they will sanction the transaction, or if the transaction has already proceeded, void it. In these situations the board of directors can ratify the director's actions but will need first to assess the level of risk the conflict represents.

How should the Board of Directors deal with a conflict of interest?

  1.  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.
     
  2.  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.
     
  3. The board voting on authorisation will have the ability to name conditions on which their authorisation is given and should these be violated, then the transaction is voidable.
     
  4.  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.
     
  5.  Boards should also consider if it would be appropriate to regularly review given authorisation.
     
  6. Boards should be aware that their authorisation applies to the conflict in question but does not cover any other failures of duty on the part of the Director in relation to that conflict. Each Director is expected to continue to act in a manner and make decisions based on the best interests of the company, with or without authorisation from the board regarding a conflict.

Please note that this is a basic guide, for more information please contact a team of our team.




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