Director conflicts of interest

Limited liability companies are attractive because, as the name suggests, the personal liability of those running the company is limited. However, this is not always the case.

Being a director of a company means you owe various duties to the company. This duty applies to directors in PLC’s equally as SME’s. Just because you’ve left does not mean you are off the hook.

A director’s duties begin on the date s/he is appointed, and most obligations cease on termination. There are two exceptions in which duties continue after the directorship comes to an end. Former directors continue to be required to:

  • Avoid conflicts of interest as regards the exploitation of any property, information or opportunity of which they became aware at a time when they were a director; and
  • Not accept any benefits from third parties as regards things done (or not done) before they ceased to be a director.

These continuing duties prevent former directors exploiting for their own gain any property, information or opportunity which they acquired or discovered while being a director of the Company.

The duty to avoid conflicts of interest may seem an obvious duty that any responsible and conscientious director would exercise. However, it is not always possible to avoid conflicts of interest – and of the two exceptions above the duty to avoid conflicts is the one more commonly broken by former directors.

The solution, for both current and former directors, is transparency. The board of directors can sanction and waive a conflict of interest following proper disclosure.

Disclosure can avoid getting tangled in a web of accusations relating to breaching directors’ duties .

Do conflict of interest rules apply after you have left the company?

The duty to avoid conflicts of interest lasts beyond your tenure as a director and a recent High Court decision has established the vast extent of how far this duty can stretch. But, as we explain below there may be card out of jail cards available.

Recent case on post termination director conflicts of interest

A recent case decision scrutinised the duty to avoid a conflict of interest after a director has terminated his directorship. In this case the information exploited by the former director was his awareness of certain rights under an IP licence agreement.

During his term in office, the director became aware of the confidential terms of an IP licence agreement of critical importance to the business of the Company. After the acrimonious termination of the director, the director became aware of an opportunity to acquire shares in the company that was the contractual counterparty to the licence agreement. The sole objective of acquiring those shares was to exploit specific IP rights under the licence agreement.

The former director was only able to gain knowledge of the licence agreement as a result of being a director. By exploiting this information, he infringed the ongoing duty to avoid a conflict of interest was imposed by the Companies Act 2006. The director was ordered to pay £200,000 to the Company in damages for breach of duty and to provide an account of profits accrued whether directly or indirectly from the exploitation of the rights acquired as a result of breaching the conflict of interest.

What does this mean for directors?

This case serves as a stark reminder that the scope of directors’ duties is wide. Of course, directors can exercise the skills and knowledge that they attained during their term in the course of their future careers, but, it is important to remain mindful of the potentially fine line between that and the exploitation of property, information and opportunities belonging to the Company. This is particularly so in the wake of the expulsion of a director following a dispute .

A director that is found to be in breach of any statutory duties can face significant personal liability, including and the potential liability to account for profits.
Undoubtedly, this case will resonate throughout many companies and directors, including former directors. There is a risk that the floodgates will have opened and we could see companies bringing claims against former directors for breaching statutory duties well after their term in office. This is even more likely with a destabilised economy following Brexit and recovering from a global pandemic.

Lawyers for directors

We can often help directors overcome the problems, often relating to conflicts with connected persons, having a hand in the company till, taking valuable client database information, stealing IP and under cutting. There are some defences available in many cases around where the line is drawn on what a conflict is. There are also some circumstances where a situation cannot reasonably be regarded as likely to give rise to a conflict.

We advise both directors and companies on breach of directors’ duty. Our corporate dispute lawyers have solved many thorny issues. We balance being tactical and commercial in the approach and handling of a case. Please do call us – 0207 438 1060.

Alex Kennedy

I know that when the noise dies down there is a solution to be found. I set about that task as quickly as possible.

Let us take it from here

Call us on 020 7438 1060 or complete the form and one of our team will be in touch.