Partner Article

Directors' conflicts of interest

with Watson Burton LLP Law Firm

Although the statutory duty requiring directors to avoid situations in which their interests can, or do, conflict with those of the company does not come into force until 1 October 2008, companies should review their position in advance of this date.

The statutory duty to avoid conflicts of interest will be brought into effect by section 175 of the Companies Act 2006. Following the introduction of this legislation, directors must not place themselves in a position of conflict, or possible conflict, between the duties owed to the company and either their personal interests or duties owed to a third party. Such conflict may occur in situations where, for example, a director becomes a competitor of, or supplier to, the company.

While there is currently a fiduciary duty to avoid conflicts of interest, the new legislation provides a positive statutory obligation to avoid conflicts of this type. Yet, in order to prevent the stifling of entrepreneurial activity, the legislation will make it easier to obtain authorisation by granting express powers to the boards of directors to sanction conflicts, provided this occurs before the conflict arises.

Subject to any provision in the company’s constitution preventing them from doing so, the board of a private company incorporated after October 2008 will simply be able to approve, in advance, a breach of this duty. Private companies incorporated before this date will need to pass an ordinary resolution in order to give directors the power to authorise a conflict. Public companies, however, will only have the option for their boards to authorise conflicts of this kind if they are specifically permitted to do so by their constitution.

Recent guidance provided by the Association of General Counsel and Company Secretaries of the FTSE 100 advises that public companies should propose changes to their articles of association at their 2008 annual general meeting to ensure that the transition can be managed effectively. They consider that most companies will want a general power to authorise conflicts and may wish to set out in their articles the procedure for proposing and authorising conflicts in order to make use of the safeguard which will apply when a board authorises a potential conflict in accordance with the articles.

Directors must remain vigilant of their duties and companies should consider putting formal procedures in place before the statutory duty comes into effect later this year. However, given the complications that exist in this area, legal advice may be required.

If you have any comments or questions about this article or about any other corporate related matter, please email eleanor.wild@watsonburton.com.

This was posted in Bdaily's Members' News section by Ruth Mitchell .