Conflicts Of Interest For Directors

Una Burke writes about conflicts of interest for directors.

Directors of companies are prohibited from benefiting where their personal interests and their duty as directors conflict. A conflict of interest is defined as “a conflict between the private interests and the official or professional responsibilities of a person in a position of trust”.

What are the duties of directors concerning conflicts of interest?

A director:

must not put himself in a position where his personal interests and duties as a fiduciary may conflict;
cannot make a personal profit from his position as director; or
must not appropriate for himself or by way of diversion to another entity associated with him, any business opportunities which the company is actively pursuing.

Circumstances where conflicts of interest can occur:

Directors failing to disclose interests or potential interests in contracts involving the company;
Directors moving to competitor and not returning all confidential materials belonging to the company;
Directors voting in relation to a contract or potential contract which involves someone connected to the director (i.e. child, spouse, related company);
Directors approaching prospective customer who was customer of old company and referring to current arrangements of customer (unless specifically disclosed by customer); or
Directors sharing information sourced from old company at meetings with new company and taking advantage of business opportunities arising from that information.

How can directors be released from their fiduciary duties?

Directors can be released from their duties as fiduciaries by agreement with the persons to whom those duties are owed. The methodology of such agreement depends on whether the dealings are

between the director and the company, or (ii) in parallel with or taking the place of dealings by the company.
Director / company dealings

In the case of dealings between the director and his company, then, for the most part, dealings are authorised by the articles of association of the company.

There are a few statutory exceptions, including:

Section 29 of the Companies Act 1990 requires shareholder approval for transactions between a director (including his family and corporate interests) and his company. There are exemptions for transactions under €63,500;

Sections 186 and 187 of the Companies Act 1963 require shareholder approval for payments to directors for loss of office or from sale of company property;

Section 31 of the Companies Act 1990 forbids loans by companies to directors (including their family and corporate interests) where the loan is 10% or more of net assets; and

Section 28 of the Companies Act 1990 requires shareholders approval for an employment contract of five years or more;

The fiduciary duties are reinforced by Stock Exchange regulation. The Listing Rules regulate transactions between companies and “related parties” (i.e. directors, substantial shareholders, those holding 10% or over of voting shares) The transactions require approval by the shareholders, unless they are very small relative to the size and value of the company. Disclosure of the following information is required in the annual report and accounts:

any contracts of significance made between the company and a subsidiary and a director or other entity where the director holds a material interest;
any contracts of significance with a controlling (30%) shareholder during a relevant period; or
any contracts for the provision of services to the company or a subsidiary by a controlling shareholder during the relevant period, unless the contract relates to services which are considered the principal business of the shareholder and is not a contract of significance.

Directors’ parallel activities

Where dealings between the director and his company are in parallel with or which take the place of dealings that the company would have been involved with and are not provided for in the articles of association, then usually full prior disclosure along with the consent of shareholders (by ordinary resolution) will be needed.

The director’s right to maintain profits in a situation of conflict may only happen once the disclosure and shareholder consent is received.

Directors must declare their interest the first time a matter comes up for discussion if they have a conflict of interest. Irrespective of such disclosure, the board has no inherent right to exempt any of its members from the rigours of the director’s fiduciary duty. It is the shareholders who must consent.

Confidential Information

When a director leaves a company in order to set up or pursue other opportunities with another company, in competition with the first, then the issue of the trade secrets and confidential information arises. The law protects company information from unauthorised disclosure.

In cases where a written contract does not exist, then the courts are prepared to imply the existence of a term either prohibiting or allowing disclosure of confidential information. Three conditions must be seen to exist in order for a breach of confidence to be actionable – (i) the information must appear to be objectively confidential, (ii) there must appear to be an obligation of confidence and (iii) there must have been a breach.

The remedies available for a breach of confidence include injunctions, damages, account of profits and delivery up of offending items. Secrecy clauses as well as non-compete clauses in contracts must be carefully drafted so as not to constitute a restriction or distortion of competition and are usually confined to no more than a year or two at most, depending on the industry sector involved.

Avoiding the Pitfalls

On the basis that prevention is better than cure, and at the risk of stating the obvious, a director should avoid situations where a conflict of interest might arise. If you are a director and you receive confidential company information from which you might profit in another capacity, then:

consider whether you should be a director;
disclose your potential interest immediately;
offer to absent yourself from discussions where such confidential discussions or potential contracts are discussed, and ask that your absence be noted in the minutes;
do not vote on any such contract and ask that your abstention be noted by the secretary in the minutes; and
keep notes of your compliance with these points.

What should a director do when leaving for a competitor?

explicitly return all confidential materials;
when approaching a prospective customer who is a customer of the old company, do not refer to any current arrangements that they have, save to the extent that those arrangements are disclosed by the prospective customer;
for a reasonable time after joining the new company keep a written record of each meeting, noting that no information which could only have been sourced from old company was introduced to the meeting or to the extent that it was, it was so introduced by the prospective customer, or was otherwise generally known to your current company other than through you; and- when quoting for business, refer only to figures from the current records of the new company or from what the customer states to be his current costs.

Conclusion

As can be seen, there are many pitfalls for directors and the consequences can be very serious. Being mindful of the issues and being wholly transparent in dealings will assist in avoiding the hazards.