K N O W L E D G E | 29 may 2018

Directors’ Conflicts of Interest: Avoid or

Manage

A director occupies a position of trust in a company and

must therefore avoid situations in which the director’s own
interests conflict with those of the company. This is
enshrined in the Companies Act 2014 (the “Act”) as the duty
to avoid conflict unless the company releases the director
from that duty. This briefing looks at some points to
consider when faced with conflicts and how they can be
either avoided or mitigated and managed.
Directors’ Duties

The director’s duty to avoid conflicts of interest is linked to the duty not to make a
personal profit from his or her position. It also applies to the duties to act in the
interests of the company, to act honestly and responsibly, to act in accordance with the
company’s constitution and for the director to exercise an independent judgement.

Questions of Conflict

Does the director have a financial, business or familial relationship with a party to the
arrangement that would reasonably undermine the director’s impartiality to the
company’s detriment? This is a helpful question to ask because the main types of
conflict arise when the director:

does not disclose an interest or potential interest in an arrangement with the

company; or
votes on an arrangement between the company and a person connected with the
director (such as a spouse, a business partner or a company that he or she
controls).

How to Avoid Conflict?

A director should seek to avoid situations in which a conflict of interest is likely to occur.
Depending on the potential for conflicts, the director should consider whether it is
appropriate to hold the office at all. Alternatively, the director could disclose his or her
interest immediately and/or not participate in discussions about, or vote on, the
arrangement. Directors of certain financial institutions and State-owned companies are
subject to more onerous requirements on conflicts of interest. These are set out in the
Code of Practice for the Governance of State Bodies 2016 and, for example, the
Corporate Governance Requirements for Credit Institutions 2015 which require that
directors will not participate in discussions where a reasonably perceived potential
conflict of interest exists.
If there is a group of companies, avoid having common directors between parent and
subsidiary companies because this can cause problems where the subsidiary’s interests
conflict with those of the parent.

Must the Director Always Avoid Conflict?

The duty to avoid conflict and to disclose personal interests can be varied or dis-applied
by the company. A company will often foresee conflicts arising and excuse a director
from his or her duties in certain respects, in its constitution. The Act provides for some
scenarios in which the company can pre-empt them by excusing the director, by
providing that “save to the extent that the company’s constitution provides otherwise”,
he or she can:

vote in favour of a contract in which the director has an interest;

hold an office or place of profit in the company;
be counted in the quorum for a meeting involving the conflict, notwithstanding his
or her interest; or
be an officer of a company promoted by the director’s company.

Disclosure and Consent

The Act provides that it is the duty of a director who is in any way, whether directly or
indirectly, interested in a contract or proposed contract with the company, to declare
the nature of his or her interest at a meeting of the directors of the company. However,
this does not apply in relation to an interest that cannot reasonably be regarded as likely
to give rise to a conflict of interest.

If there is a conflict or a potential conflict and it is not one from which the director has
been excused already (such as in the constitution), then the director must disclose it to
the company. It is then open to the director, if appropriate, to seek a resolution
releasing him or her from this duty. This can be done in general meeting or by written
resolution of the members. It is vital that the director discloses fully all material facts
about the proposed arrangement. The facts should be sought in the same way as from a
third party. In this way, the other directors are fully aware of the conflict or potential
conflict and, where appropriate, the company can make an informed decision whether or
not to so release the director from that duty.

Company Information on Conflict

If a director has signed a service agreement, he or she should have agreed to comply with
policies and procedures which deal with actual or potential conflicts of interest. If it is
not possible to avoid such conflicts, the company should employ a clear and effective
authorisation process. Policies and processes should, where relevant, extend to
subsidiary companies. This is particularly the case with policies relating to conflicts,
major transactions and related party transactions, borrowing and the provision of
guarantees.

Proper recording of declarations of interest of directors at board meetings is vital to

discharge the duty of disclosure owed by the directors to the company. Transparency in
decisions concerning conflicts is crucial and limits should be imposed on any further
actual or potential conflicts by having clear parameters around releases by the company
from that duty. The Act requires that a company establishes and maintains a register of
directors’ interests in contracts to include copies of declarations made or notices given
by directors that they are interested in certain contracts made with the company.
A director is permitted under the Act to give a general notice stating that he or she is:

a member of a specific company and should be regarded as interested in any

contract which may be made with that company; or
to be regarded as interested in any contract which may be made with a specified
person who is connected with him or her.

Any such notice must be included on this register which is open to inspection, without
charge, by any director, secretary, statutory auditor, member of the company or, upon
request, by the Director of Corporate Enforcement.

Application and Extent of the Duty

These directors’ duties in the Act apply to every person who is occupying the position of
a director, whether or not appointed formally as such (so, to “de facto directors”, and to
“shadow directors”, ie those who are unduly influential with a company’s board (but
excluding professional advisers acting as such)) and to executive and non-executive
directors alike.

The duty to avoid conflicts is supplemented by provisions in the Act such as restrictions
in relation to substantial property transactions between a company and a director or a
connected person and restrictions on loans and credit transactions from a company to a
director or connected person. These transactions and arrangements require prior
written consent from the members of the company and not merely disclosure.

Conclusion

Conflicts of interest can undermine the trustworthiness of a director and also

compromise the director’s independence, credibility and his or her effectiveness. It is
essential that directors are aware of the extent of their duties to avoid conflicts, are
familiar with the company’s constitution and with those policies and procedures of the
company in respect of avoiding or managing directors’ conflicts.

This briefing is for general guidance only and should not be regarded as a substitute for
professional advice. Such advice should always be taken before acting on any of the
matters discussed.

Key contacts

Paul Heffernan Peter Osborne Frances Bleahene

Consultant Consultant Senior Associate