Directors' Conflicts

Managing competing business interests

The reality of entrepreneurial business is that directors often have multiple business interests, directorships and shareholdings. A director may be a shareholder or an officer of other companies either in or outside a group. He may be interested in or an officer of a shareholder who has appointed him. He may be involved in industry bodies or an adviser to other businesses in the same sector or have a role as pension trustee. However, under the Companies Act 2006, a director could be in breach of his duties unless he has such potentially competing interests and duties authorised by the relevant companies and takes certain other steps to protect his position.

The act now contains a code of duties to which a director must adhere in relation to each separate company of which he is a director. For each company, he must balance the need to promote the company's success (taking into account the interests of various stakeholders (for example, the shareholders and the employees)), exercise independent judgement and comply with the company's constitution. He must not take benefits from third parties conferred by reason of his position as a director. He must also avoid certain situations in which his various interests and duties come into conflict and disclose the existence of any interest that he has or may have in transactions with the company. A director may feel that to juggle these different hats is no easy task.

However, modern company law does recognise that directors have multiple and often competing interests and allows for a director to take measures to make his task easier. The law attempts to balance the risk for the company of a director abusing his position, whilst allowing the company to protect those directors who disclose their other duties and interests and (the company's articles permitting) have them approved by either independent directors or the shareholders.

The general principles are that:
 

• the director should be able to disclose valid situations of potential conflict, such as other positions and interests that he has and ask the company to authorise them in advance. This increases transparency and gives the director comfort that he is not automatically breaching the legislation simply by virtue of the positions that he holds;
• the company's constitution may set out who can authorise such conflicts, whether it be the shareholders, other directors independent of the conflict or both;
• the company's constitution can also enable the director to take steps to manage his competing interests when they arise, so as to avoid breaching his other duties - for example, he will not want to be accused of failing to promote the success of a company simply because he does not disclose information that he holds as a result of one of his other positions. He will also not want to be liable because he excludes himself from discussions which could give him information which could bring his integrity of action as regards another company into question. It may also authorise him to pass information about a company of which he is a director to the shareholder who appointed him.

Now, while companies are modernising their constitution for new law generally, is a good time to review the company's articles of association to afford directors the appropriate authorisation route and protection. There are advantages then in conducting a disclosure and authorisation or ratification exercise of each of the directors' potentially competing interests and duties. This has benefits not only for the directors concerned but is also a useful corporate governance tool for the company.

The Change Review is offered at the discretion of Mishcon de Reya and we reserve the right not to conduct the review in any particular case.