1.5. Duty to avoid conflicts of interest (section 175)
A director must avoid situations in which he has or can have a direct or indirect interest that conflicts with, or may conflict with, the company's interests.
This duty applies, in particular, to the exploitation of property, information or opportunity, and whether or not the company could take advantage of the property, information or opportunity.
Section 175 replaces the no-conflict rule applying to directors, under which previously a director must not, without the company's consent, place himself in a position where there is a conflict, or possible conflict, between the duties he owes the company and either his personal interests or other duties he owes to a third party and applies where the situation arose on or after 1 October 2008.
This is in fact a slight relaxation of the previous rule and you may wish to amend your articles to take advantage of a relaxation and so permit independent board members to authorise conflicts of interest relating to the personal exploitation by a director of any property, information or opportunity of the company. At the same time, consider amending your articles of association to deal with specific conflicts, such as where a director is also a director of another company.
The section does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company, as that is covered by sections 177 and 182 (see below, Duty to declare interest in proposed transaction or arrangement with the company (section 177)).
The duty in section 175 will not be infringed:
• If the situation cannot reasonably be regarded as likely to give rise to a conflict of interest.
• In the case of a private company, if authorisation has been given by directors who are genuinely independent (in the sense that they have no direct or indirect interest in the transaction), unless the company's constitution prevents such authorisation.
• In the case of a public company, if authorisation has been given by the independent directors and the company's constitution expressly permits such authorisation.
Board authorisation will only be effective if the required quorum is met without counting the director in question or any other interested director and if the conflicted directors have not participated in the taking of the decision or if the decision would have been valid without the participation of the conflicted directors, (although please note that Board authorisation is not permitted in respect of the acceptance of benefits from third parties).
The duty to avoid conflicts of interest will continue to apply after a person ceases to be a director as regards the exploitation of any property, information or opportunity of which he became aware when he was a director.
If you are a director of any other company, you should bear in mind section 175 if your companies’ businesses come into contact and assess whether this does put you in a position of conflict.
You may wish to consider amending your articles to provide for such issues, for example, to provide that directors may hold additional directorships and need not disclose confidential information obtained through those other offices.
If you have any question on any of those matters, or on any of the matters covered below, whether now or in the future, you should contact David Heys at Lawson-West on 0116 212 1027 or by email at dheys@lawson-west.co.uk.
