Directors duties to avoid conflicts of interest

Company directors have statutory legal duties to avoid actions which create a conflict of interest between a director’s personal interests and what is best for the company.

The legal consequences and remedies for breach of these duties may include damages, or an injunction. The most serious conflicts of interest can also constitute a criminal offence.

Duty to avoid conflicts of interests

A director must avoid situations in which they have a direct or indirect interest which conflicts, or possibly may conflict, with the interests of the company. The most obvious example is if a director (of company A) is also a director of company B which competes, or potentially could compete, with company A. This duty is wide, however, and can include a director taking advantage of a commercial opportunity personally that he was aware the company was not going to accept. The law also covers indirect benefits where there is a conflict of interest such as where a director’s family members are shareholders of a directly competing business which benefits from the director not acting in accordance with his or her legal duties.

As such, directors need to be vigilant in creating a clear separation between their personal dealings and interests and those that may have an impact with the company in any way.

Duty not to accept benefits from third parties

A director must not accept a benefit from a third party gained because he is a director, or gained by doing (or not doing) anything as a director. What constitutes a benefit is widely interpreted, and can relate to any financial or non-financial benefit, or gift, received either in the course of your time as a director or even after you are no longer a director at the company (if it was because of actions you took while you were a director).

For example, receiving free tickets to an event or a free holiday during the course of negotiations with a potential supplier would constitute a benefit from a third party. This duty only arises if the benefit could be seen to have given rise to a conflict of interest.

Duty to declare any interest in a proposed or existing transaction

A director who is in any way, directly or indirectly, interested in a proposed, or existing, transaction or arrangement with the company, must declare the nature and extent of that interest to the other directors.

Under this duty, if there is a proposed transaction, the director only needs to declare their interest in order to be compliant. As long as the interest has been declared and the board decides to continue with the transaction anyway then no breach will have occurred.

What can a company do if a director breaches their duties?

Legal consequences of a breach will vary on the severity and the damage that has been done to the company. This can be limited to compensation or damages paid to the company, however a failure to disclose an interest in an existing transaction can result in a criminal offence and a fine.

Ultimately, it is the company that will decide whether to pursue a director for breach of duties. If the directors and shareholders believe that the director has acted honestly and in the best interests of the company, they can decide not to pursue the director for compensation. However, breach of one of the key conflict duties can generally not be ratified, other than in specific circumstances, after the fact by either the board of directors of the shareholders.

What can Directors do to avoid a conflict of interest?

Some directors, especially non-executive directors, do not always gave day to day or regular interaction or knowledge with what is going on in a company they are on then Board of. In this scenario, the director should be proactive in ensuring they have enough information to avoid a conflict. It is incumbent on a director who is not actively involved to be alert to the potential for conflicts of interest especially if on the Boards of a number of businesses.

Directors should ensure that where any potential conflict of interest might arise they have a policy of seeking the clear approval and authorisation of the board of directors before proceeding.

Being clear about the extent of the potential conflict, and not accepting any benefits that have come from third parties, will generally be enough to comply with the relevant duties.