Conflicts of interest: What do company directors need to be aware of?

For anyone sitting on a company board, balancing commercial interests with legal obligations is part of the role.

However, one area that directors should pay close attention to is disclosure of interests (whether direct or indirect) and/or conflicts of interest.

Handled properly, it’s a manageable issue. Handled poorly, it can lead to reputational damage, legal consequences or even the loss of a directorship.

What is a conflict of interest?

Whilst directors of limited companies have long been expected to act in the interests of their business, the Companies Act 2006 brought these expectations into a formal statutory code for the first time.

The first set of duties came into force on 1 October 2007, with the final three following on 1 October 2008.

These duties apply to every company director, whether of a small private company or a publicly listed group.

One of the key duties for company directors is to avoid conflicts of interest and to disclose any direct or indirect interest in a transaction.

This means directors must not put themselves in a position where their personal interests (or their obligations to others) could interfere with their duty to act in the company’s best interests.

The duty applies to both actual conflicts and situations where a conflict is reasonably foreseeable.

It also covers the use of company property, opportunities and confidential information, and applies whether or not the company itself could have taken advantage of the opportunity in question.

Conflicts tend to fall into two categories:

• Situational conflicts, which arise from a director’s role or position. For example, being a director of two different companies operating in related markets.
• Transactional conflicts, which relate to a specific deal or arrangement, such as awarding a contract to a relative’s business.

The legislation is designed to promote transparency and fairness, but also to give directors clarity on where the boundaries lie.

Conflicts of interest to watch out for

The most common conflicts we see in practice include:

• Holding board positions at two or more companies with overlapping commercial interests.
• Investing personally in a supplier or competitor.
• Using company information for personal or third-party gain.
• Awarding work to a family member’s business.
• A director also acting as a landlord, customer or supplier to the company.

It’s not just your own interests that count. The law also looks at the interests of people closely connected to you, your spouse, civil partner, children and others.

A director might have the company’s best interests at heart, but still fall foul if a family member benefits in a way that hasn’t been disclosed.

The director’s responsibility to disclose an interest and/or conflict

When a director has a direct or indirect interest in a proposed transaction, they must disclose this to the board before the company enters into the transaction.

This interest will then need to be dealt with either in terms of the company’s articles or in terms of the Companies Act, 2006.

Where a director is conflicted but does not have a direct or indirect interest in a proposed transaction, they too should disclose this to the board, before the company enters into the transaction.

Likewise, this will be dealt with in terms of the company’s articles or in terms of the Companies Act, 2006.

If a director becomes aware of a direct or indirect interest or a conflict (or potential conflict) after a decision has already been made, they must declare it to the board at the earliest opportunity.

What happens if you breach a conflict of interest?

Failing to manage a conflict or interest in a transaction properly can have serious consequences. Depending on the circumstances, this might include:

• Having to repay any gain made.
• Losing the protection of director indemnities.
• Facing legal action from the company or its shareholders.
• Removal from the board.
• In extreme cases, disqualification or even criminal charges.

In practice, many breaches happen through oversight rather than intent, which is why it’s important to be vigilant.

Can an interest in a transaction and/or conflict of interest be authorised?

Yes, in many cases, interests and/or conflicts can be authorised by the board, provided the company’s articles allow it. Alternatively, if the articles are silent on the point, the Companies Act, 2006 does provide guidance.

The board should also consider the company’s wider interests and whether the conflict could be managed over time or if conditions should be attached.

Documenting the authorisation, the reasoning behind it and any steps agreed is just as important as the decision itself.

Good habits for directors when it comes to disclosure of interests and/or conflicts of interest

Dealing with disclosures of interests and/or conflicts is all about awareness, transparency and process.

If you’re a director, here are a few sensible steps to take:

• Keep your interests and/or conflicts under review. Circumstances change, and what wasn’t an interest (whether direct or indirect) or a conflict last year might be one now.
• Speak up early. If there’s a chance something might be seen as an interest and/or conflict, raise it with the board.
• Check the company’s articles. Make sure you understand the process for dealing with disclosure of interests and/or conflicts and that the board is following it.
• Keep things documented. If a disclosure of interest and/or conflict is authorised, make sure it’s recorded clearly in the board minutes.

If you’re unsure whether something needs to be disclosed, or you’d like to put proper procedures in place for your board, we’re always happy to advise.

Please get in touch with Matthew Johnson at matthewjohnson@palmerslaw.co.uk or Jonathan Hol at  jonathanhol@palmerslaw.co.uk for support.