Keep it legal: Conflicts of interest

Nobody wants a board without good connections. However, connections often involve competing responsibilities and engagements and, inevitably, conflicts of interest.

A conflict of interest is not necessarily a bad thing, as long as it is identified and handled properly; badly managed, it can cause a host of problems, including reputational damage.

Directors of corporate charities and trading subsidiaries should note that the law regarding directors' conflicts of interest changes from today, when the Companies Act 2006 introduces new statutory duties that codify, clarify and extend the existing law.

The act sets out three duties regarding conflicts: first, a duty to avoid conflicts of interest (which now extends to potential as well as actual conflicts of interest); second, a new duty not to accept benefits from third parties; and third, a new duty to declare any interest in proposed transactions or arrangements. There is also a separate requirement to disclose any interest in an existing transaction or arrangement.

The term 'conflict of interest' is not defined in legislation, so a common sense approach should be taken. A conflict may arise out of a financial interest or a duty of loyalty to another organisation due to trusteeship, employment, membership, shareholding or any other relationship. Essentially, if it looks and feels like a conflict, treat it like a conflict.

The expanded duty to avoid conflicts of interest may prove the most difficult to carry out. Thankfully, the act allows corporate charities to refrain from applying the duty in circumstances specified in the memorandum and articles. It also allows for non-conflicted directors to authorise a conflict where permitted by the memorandum and articles.

The reform of the law provides an opportunity for corporate charities and trading subsidiaries to review how conflicts of interest are handled. In particular, consideration should be given to updating memoranda and articles to take advantage of the new powers to disapply the duty to avoid conflicts or authorise conflicts. Board agendas should have an early item reminding directors to disclose any interests in the subject of the meeting, and minutes should record all interests disclosed and authorisations given.

 - Luke Fletcher is a solicitor at Bates Wells & Braithwaite

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