Corporate & Commercial legal expert Chris Brightling explains why for company directors, conflicts of interest are a serious matter and why it is always important to maintain a clear distinction between individual interests and the interests of the business itself.
All company directors have a duty to act in the best interests of their company. Failing to disclose a conflict of interest can carry significant penalties, and so identifying and disclosing them is a concern that demands ongoing vigilance.
In some cases, non-disclosure of a conflict of interest can result in criminal action. In this article, we will look at some common types of conflicts of interest, how to avoid them - and what the repercussions might be for failing to disclose them.
What is a conflict of interest?
A conflict of interest occurs when a person involved in multiple interests finds that they may not be able to properly serve one without working against the other. For a company director, this can mean avoiding situations in which the interests of the individual are counter to the interests of the business.
The Companies Act of 2006, which came into force in October 2008, states that a company director has a duty to avoid situations in which there could be a potential or actual conflict of interests, either directly or indirectly.
The Act goes on to state in particular that this applies to the use of property, information or opportunities belonging to the company, and specifies that “it is immaterial whether the company could take advantage of the property, information or opportunity”.
There are two types of conflicts:
- Situational (meaning the conflict arises from the circumstances of the directorship, such as being a director of two companies at once).
- Transactional (meaning the conflict relates to a specific transaction, such as one in which the director might personally benefit).
Some examples of possible conflicts might include:
- Making use of opportunities or information belonging to the company for personal purposes.
- Sitting as director on two boards at once and failing to reconcile the obligations to each of the companies.
- Simultaneous directorship of the company and also a competitor business.
- Acting as both a director and also a customer or supplier to the business in question.
- Ownership of property in proximity to property owned by the company, such that the value of the director’s property might be affected by that of the other.
- A director also acting as director of the organisation’s pension trustee company.
These rules also apply to a director’s ‘connected persons’ - in other words, spouses, civil partners and family members. This means that a director cannot act for the interests of a company while their spouse works towards a contradictory interest, for example. It is therefore important that a director carefully considers whether conflicts are created not only a result of their own circumstances but also the interests and activities of those close to them.
The responsibility for identifying and disclosing conflicts of interest is solely that of the individual director - not of the company. This is the case whether the conflict would be an immediate issue or only a potential concern.
However, some conflicts of interest may be accidental - perhaps if a transaction was undertaken without the reasonable knowledge of a particular director. The director in question therefore has a duty to make the conflict known when it becomes apparent and at the earliest reasonable opportunity. In a situation like this the transaction may become void, depending on the vote of the other directors.
Authorising conflicts of interest
In some circumstances, conflicts of interest can be approved and authorised by the board of directors. Any other directors who may also be conflicted will not be able to discuss or vote on the matter.
The Companies Act also states that all directors have a duty to "promote the success of the company", and in this regard care must be taken when authorising a potential conflict of interest created by another individual. If their decision is found to not be in the best interests of the company, a non-conflicted director may themselves also be found to be in breach of their duty.
For public companies, company directors are only able to authorise a conflict of interests where they have been specifically empowered to do so in the Articles of Association. However, the board of a private company will usually have this power unless invalidated by the Articles.
The board will likely want to decide sensibly the extent to which they give authorisation, and some decisions may need to be revisited if circumstances later change. For example, authorisation may be given for a company director to also act as a director for another, non-competing business - but if that business later enters into competition with the company, this change of context may create a new situational conflict of interests that requires board discussion.
What happens if the duties are breached?
If a director fails to uphold their duty and is found to have knowingly created or allowed a conflict of interests, the business will usually take action against them.
This action might take the form of being removed from their position, receiving fines, or having to pay for property or damages. They may also be required to account for any profits made as a result of a transaction - or even face prosecution.
For this reason, directors should regularly review their personal and business circumstances to become aware of all potential conflicts and to disclose them to the board as necessary.
Ultimately, vigilance against conflicts of interest should be an ongoing priority for any company director - and their company should have proper procedures in place for discussing and/or authorising conflicts as and when they arise.
Working first and foremost for the success of the company and prioritising that goal over the fulfilment of their own interests, a director can ensure that their duties are being properly upheld. By recording and disclosing all potential issues at the earliest opportunity, many conflicts of interest can be safely evaded before they ever occur.
For further advice on this and any other Corporate & Commercial legal issue, please contact a member of our Corporate & Commercial team.