7.2.5.3 Conflicts of interest

Section 177 CA 2006 requires a director to declare the nature and extent of an interest in a proposed transaction or arrangement with the company to the other directors, because it might influence his independence. Such a declaration must be made prior to the moment the company enters into the transaction or arrangement. Section 182 CA 2006 is comparable, but differs in the sense that it applies to an existing situation, which has already been entered into by the company. This covers situations of newly appointed directors who have an interest in an existing situation. Such a declaration must be made as soon as reasonably practicable. The requirements do not apply to situations when the director is not aware of the interest. Furthermore, the declaration of the interest is not required if it is likely that it will not generate a conflict of interest, or if the other directors are already aware of the interest, or if it concerns the terms of his service contract (Davies et al. 2008: 16.43-16.47).

Section 175 CA 2006 describes the duty to avoid situations in which the director ‘has, or can have, a direct or indirect interest that conflicts – or possibly may conflict – with the interests of the company.’ Any conflict that arises from the exploitation of any property, information or opportunity of the company falls within the scope of this duty. It is immaterial in this respect whether the company can take advantage of the property, information or opportunity.

Conflicts of interest arising from self-dealing transactions are not covered by this section of the Companies’ Act, because this is dealt with by section 177 CA 2006, which is described above. Section 175(4) CA 2006 provides that there is no breach of duty if the situation cannot be regarded as likely to give rise to a conflict of interest or if it is authorised by the other (uninvolved) directors. Such authorisation is provided for in sections 175(5) and (6) CA 2006 (Davies et al. 2008: 16.63, 16.69; Andenas and Wooldridge 2009: 273).

The last duty described here is the duty not to accept benefits from third parties, provided for in section 176 CA 2006. According to this duty a director must not accept any benefits ‘from a third party conferred by reason of – (a) his being a director, or (b) his doing (or not doing) anything as director.’ Section 176(4) CA 2006 states that the duty is not infringed if the benefit received cannot reasonably be regarded as likely to create a conflict of interest situation. The reason that these benefits of third parties are not covered by section 175 CA 2006 is that section 176 CA 2006 does not provide for authorisation of the receipt by uninvolved directors. The risk of such benefits is so high that it is thought to be proper to require approval of shareholders instead of authorisation of fellow board members, as is provided in section 180(4)(a) CA 2006 (Davies et al. 2008: 16.75).

Besides the Companies’ Act 2006, the model articles of association provide in article 16 for conflict of interest situations. A director with a specific interest in an actual or proposed transaction or arrangement may not be counted as participating in the decision about that transaction or arrangement for quorum or voting purposes. It is possible to divert from these provisions under three conditions: if it is determined by an ordinary resolution, or if the interest cannot be regarded as likely to give rise to a conflict of interest, or if it is a conflict of interest from a permitted clause. These permitted clauses are provided in article 16(4) of the model articles of association. Paragraphs 5 and 6 of the article provide that the final decision regarding whether a director is allowed to participate in the decision about the transaction or arrangement is referred to the chairman or – if it concerns the chairman – to the other directors of the board.