In April 2008 we reported on directors' duties to avoid conflicts of interest. This article is a reminder that, from 1 October 2008, a director of a company will have a statutory duty under section 175 of the Companies Act 2006 (the Act) to avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. This duty is separate from, and does not apply to, the duty not to accept a benefit from a third party (unless the benefit cannot reasonably be regarded as likely to give rise to a conflict) and the duty to declare interests arising in relation to a transaction or arrangement with the company (which are covered elsewhere in the Act).
The section 175 duty will not be infringed where the matter has been authorised by the directors under the provisions of that section. This new power whereby conflicts can be authorised by directors is in addition to the ability of shareholders to sanction conflicts under the existing law, whether by shareholders' resolution or through appropriate authorisation in the articles of association.
In the case of a public company, authorisation may be given by the directors where its constitution includes provisions enabling the directors to authorise the matter and the matter is proposed and authorised by the directors in accordance with the constitution. It is for this reason that many public companies have amended their articles to include specific provisions which will take effect from 1 October 2008 and which permit directors to authorise conflicts which would otherwise be prohibited under section 175.
In preparation for the implementation of the new statutory duty, directors should be briefed on the new duty and asked to identify situations in which their own interests conflict, or may conflict, with those of the company. Procedures will need to be put in place to identify and, where appropriate, authorise relevant situations and companies should consider holding full board meetings (the legislation does not permit this to be dealt with by committee) either prior to, on, or shortly following, 1 October 2008 for this purpose. Whilst the new duty only applies to conflict situations arising on or after 1 October 2008, significant changes in any pre-1 October 2008 conflict situations could result in a breach of the duty unless directors' authorisation is obtained.
In the case of a private company, directors can authorise conflict situations provided nothing in the company's constitution invalidates such authorisation. Accordingly, unlike public companies, there is no need for private companies to include specific provisions in their articles. However, any private company which wishes to allow its directors to authorise conflict situations and which was in existence before 1 October 2008 is required by transitional arrangements to pass an ordinary resolution to allow its directors to authorise conflicts under the new procedure. Private companies incorporated after 1 October 2008 do not need to pass such a resolution.
Private companies in existence before 1 October 2008 have two options:
- Option 1: Private companies can pass an ordinary resolution to allow directors to authorise conflicts under the Act. In this case, the steps outlined for public companies in the fourth paragraph of this article under the heading "Public companies" would be equally applicable and should be followed. In addition to passing such a resolution, it may be helpful for private companies to set out provisions in their articles enabling the directors to authorise conflict situations for the purposes of section 175 (similar to those being adopted by public companies) in order to give the board comfort that the framework for authorising conflicts of interest is clear and has been approved by shareholders.
- Option 2: Private companies (particularly those which are part of a group) may decide that it is not appropriate for directors to have the power to authorise conflicts and may therefore wish to continue to require shareholder authorisation for conflict situations, on a case by case basis, as provided for under the pre-1 October 2008 law. Such companies will obviously not need to pass an ordinary resolution allowing directors to authorise conflicts under the Act and should bear in mind that, as a result, the section 175 authorisation procedure will not be available to them. This option may be the preferred approach for group subsidiaries without main board representation where the main board may be reluctant to confer the power to authorise conflicts on subsidiary boards.