04/08/08 Directors' Conflicts of Interest & the Companies Act 2006
04 August 2008
Facts
With effect from 1 October 2008, section 175 of the Companies Act 2006 will impose a duty on company directors to avoid situations in which they have, or could have, interests which conflict, or which may conflict, with the interests of their company.
The duty applies to the exploitation of any property, information or opportunity regardless of whether the company could take advantage of it.
Under s 175(4) the duty is not infringed if (a) the situation cannot reasonably be regarded as likely to give rise to a conflict or (b) if the matter is authorised by the directors.
S175 allows the directors to authorise matters that give rise to actual or potential conflicts where the company is a private company and nothing in the company’s constitution invalidates such authorisation or where the company is a public company and its constitution includes provision enabling the directors to authorise the matter.
S180 (b) provides a safe harbour where the company’s articles contain explicit procedures for dealing with conflicts of interest, with the result that the general duties of the directors are not infringed by anything done by the directors, or any of them, when following those procedures.
Application/Action needed
This new statutory duty will be relevant to both directors of trustee companies (who are likely to have interests as scheme members and/or as officers or employees of the scheme employer) and directors of employer companies who have conflicting interests, and indeed duties, if they also serve as trustees.
Before 1 October 2008 a board of directors will want to consider the situation of each of the company’s directors to determine if they are likely to encounter actual or potential conflicts and whether they need to be approved in accordance with s175 (4). The duty is not infringed if the actual or potential conflict is authorised by the other directors.
Authorisation by the board cannot be retrospective and authorisation will apply to the conflict situation, but not other breaches of duty. Any authorisation by the directors should be specific detailing the matter authorised, how long the authority is going to last, and any terms imposed.
When authorising conflicts directors will need to have regard to their own general duties and safeguards will need to be applied when decisions are made. In particular the following will apply:-
(a) only directors who have no interest in the matter being considered will be able to take the relevant decision; and
(b) in taking the decision the directors must act in a way they consider, in good faith, will be most likely to promote the company’s success.
A practical approach on how to deal with this new legislation could be to amend the company articles in order to take advantage of s180 (4) (b) the “statutory safe harbour” as follows:
(a) for the articles to be changed so that they set out the circumstances in which the duty will not be breached (e.g. the trustee company’s articles provide that there will be no breach of duty if the conflict arises from a director’s involvement with a participating employer or as a member of the scheme); or
(b) the articles are changed in order that they grant to the board power, when authorising a conflict, to stipulate how the director should manage the conflict (e.g. providing that confidential information received from third parties as a result of an authorised conflict does not need to be disclosed to the company, and dealing with attendance at relevant board meetings).
At present there appears to be no legal consensus as to which is the correct approach. However, whichever approach is adopted, this work should be undertaken in conjunction with the establishment or review of the trustees’ conflicts policy.