Conflicts of interest are part of doing business, and when they arise it is important for directors to handle them appropriately.
The existence of a conflict is not unlawful, but directors of Irish companies are under a general duty to avoid conflicts of interest wherever possible, and when they arise, directors must disclose their interests.
Failing to properly disclose can result in severe consequences. In certain situations a contract giving rise to a conflict can be voidable at the discretion of the company. And in more serious situations, a director can be held liable for the debt owed under the contract.
Some issues for directors to consider in the discharge of their duties :
Conflicts of interest can be direct or indirect. The board of a company must be fully informed of the extent of the conflict. If the conflict is clear and obvious, e.g., a contract directly with a director, then little explanation is required. But if it is indirect, such as a contract with a company owned by a director, or a spouse or child of a director, a fuller explanation from the director may be necessary.
The extent of the information which a director needs to disclose is not defined, but disclosing too little may be a breach of a director’s duty.
The disclosure must be made at the first board meeting at which a proposed contract is considered, and certainly before a contract is finalised. The board of directors may consider a particular contract over a series of board meetings – the declaration need not be repeated at every meeting.
A declaration made outside of a board meeting is not valid. This applies even if the other directors are already aware of the conflict of interest.
The disclosure may be stated in general terms. A director does not need to disclose how they might profit from a contract. It is only necessary for a conflicted director to put the company on notice that they are conflicted.
The purpose of a declaration is to ensure the disclosure of a director’s interest in a contract or proposed contract. Whether such contracts are in the best interests of the company is immaterial.
The minute book should be up to date, ensure that any conflict is noted in the register of director’s interests, and that a written notice of the conflict is served on the company at the relevant board meeting where the contract is discussed.
A valid disclosure of a director’s conflicts of interest has technical requirements, which must be observed. A director should disclose any personal interests that may be relevant and must also bear in mind that the obligation is ongoing. A director’s interests may
change over time and they must continually scrutinise their personal interests for any conflicts with their directorships.
We regularly publish useful content on a wide range of legal and business topics. Please click the button below if you would like to receive these by email.Subscribe