Next month the provisions of the Companies Act 2006 on directors’ conflicts of interest come into force, and will apply to board members of any company from 1 October.
The provisions are really a codification of existing common law rules on the fiduciary duties owed by directors, and, as such, board members of industrial and provident societies and trustees are likely to be expected by the courts to adhere, in principle, to these provisions.
The provisions are:
- Section 175 - directors are required to avoid situations in which they have a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. This applies in particular to the exploitation of any property, information or opportunity, and it is immaterial whether the company could take advantage of these. Directors do not infringe this duty if the situation in question cannot reasonably be regarded as likely to give rise to a conflict of interest.
- Section 176 - directors are obliged to not accept benefits from third parties that are conferred because he or she is a director, or because he or she does (or doesn’t) do something as a director. This duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest, and this duty does not apply to benefits conferred by the company of which he or she is a director, or to benefits conferred by associated companies.
- Section 177 - if a director of a company is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors. This declaration must be made before the company enters into the transaction or arrangement. A director need not declare an interest if it cannot reasonably be regarded as likely to give rise to a conflict of interest. A director need not be a party to a proposed transaction or arrangement for this duty to apply. If someone else’s interest in the transaction or arrangement amounts to an interest of the director, he or she must declare it.
Directors must also declare interests in existing transactions or arrangements of the company (for example any that may have been in existence before the director became a director).
Although none of the above is actually new, the imminent introduction of the provisions has caused many people to realise that the duties are wider than they thought. This is particularly the case with the “situational” nature of the section 175 duty to avoid actual or potential conflicts of interest. While directors are generally used to declaring interests when issues of the transactional nature envisaged by section 177 arise, they are perhaps less familiar with having to do so in relation to section 175 conflicts. Such conflicts could arise for instance in circumstances in which directors have multiple directorships. If someone is director of two companies, which at present do not do business with or compete with one another but which could do in the future, there is a potential conflict for the director. Another example could involve circumstances in which an RSL board member works for another company (being permitted to do so under the old Schedule 1 regime) which provides services to the company of which he is a board member, and at the next board meeting issues of service performance are to be raised.
Given the ease with which conflicts can arise, and the fact that for reasons of business efficacy conflicts will often have to be managed, the 2006 act allows section 175 conflicts to be authorised. This can be done (as previously) by the shareholders, or now under the act, by the directors. In private companies formed before 1 October 2008, shareholders can authorise directors to authorise conflicts by passing an ordinary resolution, either in general meeting or by written resolution.
Another option would be to change the company’s articles of association to allow the directors to authorise conflicts. This would ensure that the company’s code of practice for dealing with conflicts of this nature is enshrined in its articles. Conflicts that pre-date 1 October 2008 are governed by the old law, which means they should be approved either by resolution of the shareholders or by the articles of association.
In private companies formed on or after 1 October 2008, directors can authorise conflicts provided there is nothing in the articles that invalidates the authorisation.
The new provisions governing conflicts of interest serve as a timely reminder that associations should maintain a comprehensive conflict of interest register and have appropriate terms of reference. Board member codes of conduct or contracts should also address how the association and board members should deal with both potential and actual conflicts of interest.
In order to do this, the board should adopt policies to address the issue of conflicts. For such policies to be effective, it is important that they not only include a general statement about handling conflicts, but also address common exceptions, such as board members who are also on the boards of other group members.
Any policy should also dovetail with the association’s constitution and (if relevant) with the NHF’s Code of Governance.