As the law on directors’ conflict of interest has now been around for some time, implementing it can become routine and it’s tempting to assume everyone knows what they should be doing. However, there will be a need to brief new directors and from time to time it does not hurt to remind existing directors of what the actual rules and obligations are, rather than what they remember – which might not be the same.

The Act

The CA 2006 provisions can be summarised as:

  • A director must avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company (from s175)
  • Directors must not accept benefits from third parties by reason of their office or of doing or not doing anything as a director (from s176)
  • Directors must declare to the board their interests in any existing or proposed transactions to which the company is a party (from ss 177 and 182). The nature and extent of their interest should be disclosed.

None of these duties will be infringed if the situation, interest or benefit is such that it cannot reasonably be regarded as likely to give rise to a conflict or if it is authorised by the other directors (see further below).

Authorisation

Directors may authorise any actual or potential conflicts of interest provided that:

  • For public companies – the articles permit it.
  • For private companies formed before 1 October 2008 – an ordinary resolution of members has been passed to permit the board to use the power to authorise conflicts. This resolution has to be filed at Companies House. It is possible that for many dormant or wholly owned subsidiaries this exercise did not happen. If the status of those companies changes and they become more active then this point should be checked.
  • For private companies formed after 1 October 2008 – there is nothing in the articles which prevents this.

Where the other directors authorise an actual or potential conflict, the quorum requirements for the meeting must be met without the conflicted director being included.

The practicalities

Disclosure

Directors must declare actual and potential conflicts of interest and there is a separate requirement to disclose interests in any transactions with the company. The latter is probably best dealt with on a case by case basis and having a standard agenda item for declarations of interest at the start of the board meeting agenda can be a helpful reminder for this. Directors also have a duty to make prompt notifications of any changes to their interests. It is obviously useful to keep a record of directors’ interests.

Connected persons

There is no specific reference to the interests of a director’s connected persons (CA 2006 ss 252-255 provide the definition) however, this should be borne in mind – a director is treated as being aware of matters of which they ought reasonably to be aware. It will be a matter of judgement as to whether there is an actual or potential conflict and whether authorisation is required.

Procedure during meetings

The articles will give some guidance on what to do if an actual or potential conflict arises. Judgement will be needed and appropriate action will depend on the size and materiality of the conflict. The director may be asked to step out of the meeting for the item of business or it may sometimes be acceptable for the director to remain in the meeting but not to speak or vote on the matter. In other cases, it may be permissible for them to speak and vote (provided the articles allow this).

Minutes

Minutes drafted to approve a particular transaction often contain a standard paragraph about directors’ disclosing their interests. There are some instances where this may be important, for example, if a board is approving a placing and some of the directors may be large shareholders. However, for regular board meetings, the danger with standard wording being inserted every time, is that people are lulled into a false sense of security that this wording magically fixes any issues and they forget what it is they should actually be doing and thinking about.

Accepting benefits

The provisions of the act regarding not accepting benefits can usually be managed by directors following an appropriate gifts and hospitality policy. Again disclosure is key. The Bribery Act which came into force sometime after the CA 2006 provisions is also relevant. This should be covered as part of a director’s induction and there should be regular updates on it to the board, both in terms of their personal obligations as well as the company’s compliance.

New board members

As part of a director’s induction, the company secretary should ensure they obtain a list of the new director’s other interests, explaining to them what they need to disclose and arrange for these interests to be noted at the next board meeting. The new board member should also be briefed on the relevant company policies and procedures.

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Shaun works in our company secretarial team supporting various client companies, including AIM listed, technology start-ups and SME companies.

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Published: 27th July 2022
Area: Corporate & Commercial

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