British Columbia’s new Societies Act came into force in November 2016. In addition to requiring that approximately 27,000 B.C. societies transition in the next two years, the legislation has brought changes that affect their governance and operations. In this bulletin, we will focus on the conflict of interest rules for directors and senior managers under the Act.
Conflicts of Interest
Directors and senior managers owe a fiduciary duty of loyalty to their societies. This means that they must place the interests of the society above their personal self-interest in all dealings with and for the society. In particular, they must avoid situations in which their duty to the society conflicts with their personal, work, or business interests or their roles as directors, senior managers, or officers in other companies or not-for-profit organizations.
Conflicts of interest arise when a director (or even a director’s family or friends) might benefit financially from the actions of the organization.
Changes to the Conflict of Interest Rules
Conflict of interest rules have applied to society boards for a long time. Many societies have also adopted additional conflict of interest bylaws or policies in line with recommended best practices. The new Act, however, has brought some significant changes that directors and senior managers need to know about.
When does a Conflict of Interest Exist?
On the one hand, the new rules are less onerous for directors and senior managers. Now a conflict only exists if the director or senior manager has a material interest in a proposed or actual contract, transaction, or matter. The new materiality threshold means that fewer contracts or transactions may rise to the level of a conflict of interest. Materiality is not defined in the Societies Act, but drawing on other legal contexts, we can expect that it will take into consideration the specific situation of the director or senior manager in question and assess from the perspective of a reasonable person whether the interest is significant under the circumstances.
On the other hand, conflicts are no longer limited to contracts or transactions (as under the old legislation), but may also arise with respect to any matter considered by the a society board, in which the director or senior manager has a direct or indirect material interest. If that interest could create a duty or interest that materially conflicts with the duties or interests of the person in their role director or senior manager of the society, a disclosable conflict exists. For instance, imagine that a director sits on the boards of two societies, which are both applying for limited government funding for similar programs or services. In our example, the societies would effectively be competitors for the same grant, and therefore, the duties and interests owed by the director to each society would conflict. Therefore, the director would need to disclose the conflict to both societies.
New Rules of Conduct in Case of a Conflict
Once you have determined that a conflict exists, what happens next? Following widely recognized best practices, the new Act has created conduct obligations for directors and senior managers which aim to ensure full, frank and uninfluenced discussions and decision-making by those board members who are not conflicted. Now, directors and senior managers must:
- disclose fully and promptly to board the nature and extent of the conflicting interest;
- leave the board meeting when the contract, transaction or matter is discussed or being voted on by the directors unless asked by the board to be present to provide information.
- abstain from voting on or consenting to a directors’ resolution in respect of the contract, transaction or matter; and
- refrain from any action intended to influence the discussion or vote on the contract, transaction, or matter.
Societies must ensure that they retain written records of the conflict of interest disclosures made by their directors and senior managers. The disclosure can be recorded in the minutes of directors’ meetings, written consent resolutions of the board, or in a communication from the conflicted individual addressed to the board and delivered to the delivery address or sent by registered mail to the registered office of the society. These records are accessible to inspection and copying by all members of the society.
Exceptions to Disclosure Requirements
There are a few exceptions to the disclosure and conduct rules. They do not apply to:
- remuneration for being a director or reimbursement to a director by the society of a director’s reasonable and necessary expenses;
- indemnification of a director or senior manager; and
- obtaining D&O insurance.
Further, if all directors of a society have disclosed a material interest in a particular contract, transaction, or matter, the Act allows the directors to vote on, or consent to, a board resolution in dealing with such a contract, transaction, or matter.
Consequences of Non-Disclosure
Failure to adequately disclose a conflict to the board and failure to follow the new rules of conduct can create personal liability. Directors and senior managers must pay to the society an amount equal to any profit that they make as a consequence of the society entering into or performing the contract or transaction involved in the conflict. Such liability can only be avoided by fully disclosing the nature and extent of a director’s or senior manager’s interest in a contract or transaction to the society’s members. The members must then approve the contract or transaction by special resolution to relieve the director or senior manager from liability.
Third Parties are Generally Protected
The existence of a conflict of interest generally does not affect the validity of the contracts or transactions in question. This creates certainty for third parties who can rely on agreements with the society. However, if the contract or transaction has not been approved internally by the society, the society itself or another qualified person can ask the B.C. Supreme Court, among other things:
- to prohibit the society from entering into a proposed contract or transaction; or
- to set aside a contract or transaction that was not reasonable and fair to the society when entered into.
When in Doubt, Declare
Directors and senior managers should carefully and continually consider all situations where their relationship with the society could lead to a conflict and, when in doubt, disclose potential conflicts. Avoiding and disclosing conflicts of interest is not only fundamental to acting in the best interests of a society. Doing so is also in the best interests of the conflicted party as it is an important step in avoiding personal liability.
Directors who recuse themselves from board meetings as a result of a conflict may also wish to ensure that this step is reflected in the board minutes, as it will establish a record of their compliance with the new conduct rules. Boards may also wish to review the conflicts of interest rules on a regular basis, for example, each time new directors are elected or appointed.