4.6.5 Conflicts of interest

The Mediasafe II case (1998)6 put an end to the old practice of permitting one person to represent many parties in a deal. An agreement was signed by one director for the parent and the subsidiary to give set-off and/or joint and several claim rights to a bank. As the bank could have known of this conflict of interest, it could be held against the bank, thereby invalidating the signature. This was notwithstanding the general rule that the signature of a registered management board member binds a bank.

This Mediasafe H case drew attention to the issue of conflicts of interest and resulted in a flurry of cases. Brandao (2002)7 dealt with a real material conflict of interest where Mr A.J. Maren, as director of Burgslot N.V., signed an agreement on behalf of Sundat N.V., a management BV company which he also represented. Sundat B.V. hired out Maren's two sons to Sundat N.V. on conditions that were very favourable for the sons. Brandao, as shareholder of Sundat N.V., asked the court to set aside the decision of Sundat N.V. to enter into this agreement. It argued that the director of Sundat N.V. had decided to give his sons (working via a management BV) favourable employment terms. The Supreme Court set aside the agreement. This case was comparable to the decision in the old case of Maas v. Amazone (1940)8 where father Maas, acting as director on behalf of the employing company, signed a favourable employment contract in favour of his own son. Here the Supreme Court judged the father to have a conflict of interest. I assume that the Delaware and UK courts would do the same, unless the board or shareholders had ratified the agreement. Dutch law does not have this ratification process.

Duplicado (2004)9 confirmed the Mediasafe // judgment. In this case, a director who owned 100% of the shares of two companies signed on behalf of both companies. His signature was held to be invalid.

Subsequently, the Bruil (2007)10 judgment gave a more nuanced and substantive answer to the question of conflict of interest. Mr Bruil was 100% shareholder and managing director of both Bruil Arnhem B.V. (BA) and Bruil-Kombex B.V. (BK). These companies were both fully owned by Mr Bruil. On behalf of these two companies Mr Bruil had signed contracts under which BA sold some but not all of its real estate to BK (the sale was good for both parties, the price was fair and BA got a contract to build a factory for BK). Each company gave the other a right of first refusal on its real estate. All the shares in BA were subsequently transferred to Ballast Nedam white Mr Bruil kept all the shares in BK. In due course BA sold its real estate to Femhout B.V. without allowing BK to exercise its right of first refusal. BK claimed a penalty payment from BA for its breach of the right of first refusal. BA defended itself by arguing that the right of first refusal was invalid because Mr Bruil had signed on behalf of both companies and had a formal conflict of interest. The argument was rejected by the District Court, but accepted by the Court of Appeal. Before the Supreme Court gave judgment in favour of BK (thereby refusing to set aside the contract), Advocate General L. Timmerman gave a detailed opinion in which he discussed all the case law and literature as well as American law.11 He argued that all of the cited material favoured a nuanced case-by-case factual test of conflict of interest over a mere formal test. The bare possibility of a conflict of interest is not sufficient. He advised that a conflict should be deemed to exist where a personal interest prevails over a company interest, even when no one has suffered any damage. As his opinion was accepted by the Supreme Court, the existence of a conflict of interest now has to be judged on the facts of the case.