Directors’ conflicts of interest

This October, new provisions of the Companies Act 2006 will come into force, setting out in statute for the first time the duty of directors to avoid conflicts of interest with their company.

As well as formalising an existing duty, the wording of the statute has led to concern that the obligation has been significantly extended. Directors will need to focus not just on existing conflicts, but any situation in which they might, at some time in the future, have an interest that conflicts with the interests of the company.

Take, for example, the situation of a non-executive director who is on the board of two companies in the same industry sector. Both value his industry expertise. Under the current rules, there is no problem unless the interests of one company conflict with those of the other.

From October, the director should not wait for such an issue to arise, but actively ensure both companies give formal authorisation to remain as a director, or stand down from one of the companies. Failure to do one or the other could lead to legal action for breach of duty and risk adverse publicity for the entire board.

Companies, therefore, face the prospect of multiple resignations this Autumn, unless they have procedures in place to give the necessary authorisation. Another new provision in the Companies Act will make this considerably easier.

“Directors will need to focus not just on existing conflicts, but any situation in which they might, at some time in the future, have an interest that conflicts with the interests of the company.

Under the current rules, if a director wants to seek approval from a company where he faces a conflict of interest, that approval has to be given by shareholders. From October, it will be possible for approval to be given by the other directors. Companies need to consider whether this is a matter which should be delegated to the board in this way, or whether it should be reserved to shareholders.

Different rules apply to private and public companies in relation to board approval. Public companies will have to change their articles of association to include a specific provision giving the board this power. Private companies will not have to change their articles of association, but all existing private companies - and any new ones, incorporated before October - will have to pass an ordinary resolution if they want their directors to be able to authorise conflicts of interest.

Companies should ensure all board members are aware of the new rules on conflicts and that all situations where directors might, at some stage, face a conflict of interest are identified. Each situation needs to be considered on its own merits and a decision taken as to whether it is better to grant authorisation or for the director to step down. Where situations which might lead to conflicts of interest are authorised, ground rules should be laid down, setting out how conflicts should be handled in practice if they arise.

Danielle Harris is a professional support lawyer in the corporate department at Maclay Murray & Spens LLP