Directors' Conflicts of Interest

From 1 October 2008, s.175 Companies Act 2006 (the "Act") has placed a new positive duty on directors of private companies to avoid situations where a director has or can have a direct or indirect interest that conflicts or possibly may conflict with the interests of the Company.

Under the old regime when a material conflict of interest arose, the director concerned would take steps to mitigate the conflict by, for example, absenting himself from board discussions and, in extreme cases, standing down from the board. Under the new duty a director must not let the situation arise in the first place unless the board has given prior authorisation.

This new duty is wider than the corresponding common law duty and it has been our experience that since it was introduced, it has had significant practical consequences for boards of directors.

There are a number of everyday circumstances which give rise to a conflict of interest between a director and the Company.  These include where a director:

• is a shareholder of the Company;

• is also director another company with whom the Company has regular dealings (including intra-group transactions);

• is a trustee of the Company's pension scheme;

• has an advisory role (for example financial or legal) with the Company; or

• is a potential customer of or supplier to the Company

Directors' approval of conflicts of interest

S.175(4) of the Act provides that the duty to avoid conflicts of interest will not be infringed if the matter in question has been authorised by the directors. Essentially boards can now vote to approve a director's conflict of interest provided that the conflicted director does not form part of the quorum approving the conflict in question and does not vote on the resolution.

At the moment, for companies which were incorporated prior to 1 October 2008, directors' conflicts of interest can only be authorised by the board if the shareholders of the Company have passed an ordinary resolution allowing them to do so- a process that can be time consuming and impractical. Furthermore, shareholders are not obliged to approve such conflicts.

An alternative approach is to amend the Company's articles of association.  The articles can give the board power to authorise conflicts or to even approve the existence of specific conflicts.

This latter approach is particularly useful in situations where all of the directors are conflicted in terms of the Act ,and the board cannot act to approve the conflict or where a quorum cannot be achieved as a result of one or more directors not being entitled to be counted in the quorum.
If the Articles specifically approve the existence of a conflict, no further shareholder or board approval is required.

For companies which were incorporated after 1 October 2008, the Board is permitted to authorise a conflict so long as the Company's articles do not provide otherwise.

Next steps?

To the extent they have not already done so, companies should undertake a review of the interests of their directors to identify circumstances where one or more of them may be in breach of their statutory duty.  Once this exercise has been completed, the company should either ask shareholders to pass an ordinary resolution giving power to the directors to approve conflict of interest situations or amend their articles to this effect.

The McGrigors' team can help you with the following:

Identify existing conflicts:

Our  team can help prepare a questionnaire for directors to assist the Company in identifying situations where there is a potential conflict between the directors and the Company.

Amend articles of association:

The McGrigors team can draft amended articles of association giving the board power to authorise conflicts and, where necessary giving approval to the existence of certain specific conflicts. McGrigors can also prepare the ancillary documentation required for the shareholders to adopt the new articles of association.

Alternatively, we can prepare the relevant shareholder resolution and ancillary documents if this is the preferred approach.
                       
Review SPV/Joint Venture Arrangements:

Many projects in the energy sector are carried out in special purpose vehicles – often as part of a joint venture. The conflict of interest rules should be examined in light of any shareholders agreement and contracts with the shareholders and other members of the company's group.