Kyri Papantoniou looks at the rules surrounding directors’ duties and stresses the importance of knowing your responsibilities, particularly in relation to conflict of interest.
Following allegations of harassment and discrimination made by staff against Sir Philip Green, Karren Brady stepped down as chair of Taveta Investments, the holding company of Green’s Arcadia Group. Brady’s resignation is a reminder that the directors of English companies are subject to several legal duties, which are predominantly contained in company legislation. These duties are owed by the directors to the company and directors may find themselves facing serious consequences, such as enforcement action, personal liability and even criminal action in the event of breach.
It is therefore essential for directors of property companies to be in the know when it comes to their duties and obligations and that company procedures are in place, where necessary, to ensure compliance. The key duties are:
- To act within powers
- To promote the success of the company for the benefit of its shareholders
- To exercise independent judgment
- To exercise reasonable care, skill and diligence
- To avoid conflicts of interest
- Not to accept benefits from third parties
- To declare an interest in a proposed transaction or arrangement.
Conflicts of interest
Avoiding conflicts of interest is one of the duties that can present difficulty. So what is a conflict of interest?
Section 175 of the Companies Act 2006 provides that directors must avoid a situation where there is a conflict, or possible conflict, between the duties the directors owe to the company and either their personal interests or other duties they owe to a third party. This is known as a situational conflict.
This applies in particular to the exploitation of property, information or opportunity and irrespective of whether or not the company could take advantage of it. The duty will continue to apply after a person ceases to be a director in relation to the exploitation of any property, information or opportunity of which they became aware when they were a director.
There are a couple of situations in which section 175 will not be infringed:
- if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest; and
- if the situation has been pre‑authorised (see below).
The section 175 duty relates to a situational conflict, not a transactional conflict, which is a conflict arising in relation to an existing or proposed transaction or arrangement with the company. Duties to declare interests in transactional conflicts are separate and must also always be complied with.
Identifying and acting on a conflict
I am a director of ABCXYZ Ltd and I think there might be a conflict of interest. How do I know for sure?
It is your personal responsibility to identify any actual or potential conflict situations. However, there are no hard and fast rules when it comes to identifying these. A useful test is to regard an “interest” as a broad term that includes anything that could potentially divert a director’s mind from giving sole consideration to promoting the success of the company. It would be helpful to ask yourself a series of questions, which might include:
- Is your role/connection with another party likely to prevent you, when acting as a director of ABCXYZ, from giving sole consideration to the interests of ABCXYZ?
- Is your role/connection with the other party likely to involve consideration of actions that could be adverse to the interests of ABCXYZ or put you in a position where information that you know as a result of being a director of ABCXYZ would be relevant to the decision to be taken?
Are you part of the other party’s decision-making process?
- Particularly in relation to any perceived conflict, what is the justification for ABCXYZ to authorise it?
- Do the interests of the two companies compete, for example, in relation to strategic opportunities, and would the activities undertaken in one role be likely to have a material impact on the other? An example of a conflict situation may include a director becoming a director of a similar or related company or a director in any situation where he/she can make a profit as a result of the directorship.
If in doubt it is best to err on the side of caution, follow the steps outlined below and seek independent advice.
What do I need to do in the event of a conflict?
The conflict must be pre-authorised and section 175 will not be infringed:
- In the case of a private company formed on or after 1 October 2008, if authorisation has been given by directors who are independent and essentially have no direct or indirect interest in the transaction (unless the company’s constitution invalidates such authorisation).
- In the case of a private company formed before 1 October 2008, if authorisation has been given by the independent directors provided the constitution contains nothing to the contrary and provided that shareholders have passed the necessary shareholder resolution permitting such authorisation.
Only non-conflicted directors will be able to count in the quorum of a board meeting and vote to pre-authorise the conflict. The shareholders of a company may, in principle and with full knowledge of the relevant facts, authorise conflicts of interests that would otherwise be a breach of this duty.
It is also always necessary to check the company’s articles of association for any specific provisions relating to conflicts.
Finally, you must never lose sight of your obligation to act in the context of all your other director duties – for example, promoting the success of the company, acting independently of other interests and exercising reasonable care, skill and diligence.
Kyri Papantoniou is a partner in the corporate team at Fletcher Day
