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New provisions relating to directors' conflict of interest duties - 26/08/2008
Under the new provisions, a director of a company must avoid a situation in which he has, or could have, a direct or indirect interest that conflicts with the interests of the company. This applies, in particular, to the exploitation of any property, information or opportunity by the director, irrespective of whether the company itself could take advantage of the property, information or opportunity. For example, if a director uses information about an upcoming contract, that he only knows about because he is a director, to make a personal profit, he could be in breach of the new duty. Directors with multiple directorships should also take special care, if the interests of their different companies could conflict.
However, the duty is not infringed if the matter is either authorised by the company's articles of association, or has been authorised by the other directors (provided that the company's constitution does not prohibit such authorisation).
Also, a new duty is imposed on directors not to accept benefits from third parties that are offered to them because they are directors, or because they have done (or not done) something as a director . Accepting bribes would be a blatant example, but excessive gifts or corporate hospitality could also result in a breach, in exceptional circumstances.
The directors are also under a new, statutory duty to declare to the other directors the nature and extent of any personal interest they have in any transaction or arrangement that their company proposes to enter into. The declaration must be made at a meeting of the directors, or by notice in writing, or by general notice. However, a director need not declare an interest if it cannot reasonably be regarded as likely to give rise to a conflict of interest, or if the other directors are already aware of it.
The existing rule, under which a director who is in any way interested in an existing transaction or arrangement that has been entered into by the company must declare the nature and extent of the interest to the other directors, is restated in the new 2006 Act provisions.
Recommendations
Companies should:
- Inform and educate directors about their new duties.
- Review their board procedures and practices to ensure appropriate declarations of interests are made and recorded, and consider altering their articles of association to authorise conflicts.
Directors should:
- Identify potential conflicts between their interests and the company's.
- Ensure that these are either authorised by the articles or by the other members of the board as they arise.
