'C' is for Conflicts of Interest (The A-Z of being a director)

In my blog of 15th September 2010, I pointed out that breaches of directors’ duties can have serious consequences for a director, particularly if a company becomes insolvent or after it is sold. It is in these situations that directors frequently find themselves facing claims to pay often-huge sums into the company.

One of the areas where it is easy for a director to slip up is in ‘conflicts of interest’.

The law is complicated but, for SMEs, can be summarised as follows:

• A conflict of interest is any situation where a director’s personal interest may possibly conflict with the company’s interest. This can apply to “property, information or opportunity” and so catches nearly all potential conflict situations.
  
• For a conflict situation to be lawful, certain procedures must be followed.
  
• If the company’s Constitution or Articles say that conflicts are not allowed, or set out particular procedures to be followed, then these must be followed.
  
• If a director (or a connected person, such as a family member or partner) has an actual or potential personal interest in a proposed company transaction, he or she must declare the nature and extent of this to the Board when it first considers the transaction. It is advisable for this to be done in writing or minuted. If this has not been done, shareholders should be asked to approve the conflict as soon as possible.
  
• If a director (or a connected person, such as a family member or partner) has an actual or potential personal interest in an existing company transaction, he or she must declare the nature and extent of this to the Board as soon as is reasonably practical. Failure to do this is a criminal offence and can lead to a director being removed from office. Shareholders cannot later approve this.
  
• In all other cases, conflicts must be authorised by the Board before the transaction takes place. If this has not been done, shareholders should be asked to approve the conflict as soon as possible.
  
• A director cannot accept any personal benefit from a third party (such as gifts or entertainment) unless approved by the shareholders, or specifically authorised by the Constitution or Articles.
  
• All substantial property transactions with a director must be approved by the shareholders.

If the required declarations or approvals have not been obtained, a claim can be made against the director to account for any personal profits he or she made from the transaction or to make good any loss suffered by the company.

Cousins Business Law advice for directors on conflicts is as follows:

1. Know your duties. Subscribing to our Ezine and RSS feed will help keep you on the right side of the law. If in doubt, take legal advice.
   
2. Prepare a list of potential conflicts, proposed transactions and existing transactions and follow the steps outlined above as soon as possible. If declarations need to be updated or amended, do so.
   
3. Obtain shareholders’ approval where necessary. Also, consider amending your Constitution or Articles to make dealing with future conflicts easier.
   
4. Consider taking out Directors’ and Officers’ Insurance.
   
5. If faced with a claim, take legal advice immediately. We offer a free initial telephone consultation.

Gary Cousins
Business Solicitor