The Companies Act 2006 ("CA 2006") imposes certain legal requirements on directors to avoid or manage 'conflicts of interest'. Such conflicts can arise where the personal motivations or interests of a director conflict with the duties that the director has to the company under the CA 2006.
Directors can be personally liable if they have breached any of the conflict of interest duties. Breaching the situational conflict provisions can give rise to civil remedies such as compensation or damages. On the other hand, breaching transactional conflicts can lead to criminal sanctions.
This article will look at each 'conflict of interest' duty which the CA 2006 imposes and highlight the key points to note for directors.
Duty to avoid conflicts of interest (section 175 of the CA 2006)
This first duty relates to 'situational' conflicts of interests. Under section 175, a director must avoid a situation where they have a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company, particularly to interests regarding property, information and/or opportunities.
A common example of a direct situational conflict would be where an individual is a director of two different competitor companies or where one company is seeking to obtain goods and/or services from another and the individual is a director of both. This type of situation often arises for non-executive directors with roles in various companies. Alternatively, an indirect situational conflict may arise where a director represents a majority shareholder whose interest's conflict with the company's.
This duty to avoid a situational conflict is not deemed to have been infringed if the interest could not be reasonably regarded as likely to give rise to a conflict or if the directors or shareholders have given authorisation prior to the conflict arising.
Shareholders can authorise a situational conflict through the passing of an ordinary resolution (requiring over 50% of votes at a general meeting), or in writing (resolution passed without a physical meeting taking place). The board of directors can also authorise a situational conflict if nothing in the company's constitution states otherwise. Under section 175(5), directors of private companies can authorise conflicts where the company was formed after 1 October 2008. For private company's formed prior to 1 October 2008, this power is not automatically granted to the directors and there must be a resolution by the shareholders to grant the directors with the section 175(5) authorisation.
Board authorisation will only be effective where the relevant director is not included in the quorum or voting arrangements at the board meeting authorising the conflict. The directors, when making their decision, must also consider their other statutory duties such as exercising independent judgement and acting in a manner that they consider, in good faith, would promote the company's success for the benefit of its member(s) as a whole.
Duty not to accept benefits from third parties (section 176 of the CA 2006)
The CA 2006 also imposes a duty on directors not to accept a benefit from a third party conferred by reason of them being a director, or their doing (or not doing) anything as a director. This duty seeks to prevent situations where a director is being passed benefits (both financial or non-financial e.g. gifts) to influence the individual in their role as a director. This duty shall not be deemed to have been infringed where the acceptance of a benefit cannot be reasonably regarded as likely to give rise to a conflict. Unlike section 175, only shareholders can provide 'authorisation' following the director disclosing the situation.
Duties to declare interests in proposed and/or existing transactions or arrangements (section 177 and section 182 of the CA 2006)
Two provisions in the CA 2006 impose duties in relation to avoiding 'transactional' conflicts of interest, namely:
- The duty to declare interest in a proposed transaction or arrangement (section 177)
- The duty to declare interest in an existing transaction or arrangement (section 182)
Both duties require directors to declare the nature and extent of their interest to the other directors in respect of any proposed or existing transaction.
In the case of a proposed transaction or arrangement, a declaration is necessary where the director ought to be reasonably 'aware' of their interest in respect of a transaction or arrangement. In the case of an existing transaction or arrangement (i.e. one which has already been entered into), the interest must be declared as soon as 'reasonably practicable'. Both of these duties are not deemed to have been infringed where it cannot reasonably be regarded as likely to give rise to a conflict, if the other directors are already aware of the interest, or to the extent that it concerns the terms of the directors service contract.
The key takeaway to note is that directors should ensure that they are familiar with the conflicts of interest duties outlined here (and all other directors' duties outlined in the CA 2006) so that they can more easily identify conflicts of interest and follow the correct processes required by the CA 2006 and the company's constitution. If you would like to see more information on directors duties please see our handy guide. Alternatively, if you require legal advice, please get in contact your usual Brodies contact or one of the contacts listed below.