Conflicts of interest are part of doing business, and when they arise it is important for directors to handle them appropriately.
The existence of a conflict is not unlawful, but directors of Irish companies are under a general duty to avoid conflicts of interest wherever possible, and when they arise, directors must disclose their interests.
Failing to properly disclose can result in severe consequences. In certain situations a contract giving rise to a conflict can be voidable at the discretion of the company. And in more serious situations, a director can be held liable for the debt owed under the contract.
Considerations for directors
Some issues for directors to consider in the discharge of their duties :
• Direct and indirect conflicts
Conflicts of interest can be direct or indirect. The board of a company must be fully informed of the extent of the conflict. If the conflict is clear and obvious, e.g., a contract directly with a director, then little explanation is required. But if it is indirect, such as a contract with a company owned by a director, or a spouse or child of a director, a fuller explanation from the director may be necessary.
The extent of the information which a director needs to disclose is not defined, but disclosing too little may be a breach of a director’s duty.
• When and where?
The disclosure must be made at the first board meeting at which a proposed contract is considered, and certainly before a contract is finalised. The board of directors may consider a particular contract over a series of board meetings – the declaration need not be repeated at every meeting.
A declaration made outside of a board meeting is not valid. This applies even if the other directors are already aware of the conflict of interest.
• Form of disclosure
The disclosure may be stated in general terms. A director does not need to disclose how they might profit from a contract. It is only necessary for a conflicted director to put the company on notice that they are conflicted.
• Interests are irrelevant
The purpose of a declaration is to ensure the disclosure of a director’s interest in a contract or proposed contract. Whether such contracts are in the best interests of the company is immaterial.
• Maintain clear and accurate company books
The minute book should be up to date, ensure that any conflict is noted in the register of director’s interests, and that a written notice of the conflict is served on the company at the relevant board meeting where the contract is discussed.
A valid disclosure of a director’s conflicts of interest has technical requirements, which must be observed. A director should disclose any personal interests that may be relevant and must also bear in mind that the obligation is ongoing. A director’s interests may change over time and they must continually scrutinise their personal interests for any conflicts with their directorships.