Keeping the Wolf (of Wall Street) from the door…
Although The Wolf of Wall Street is a fantastic movie it’s not an example of how we should run our companies. In the real world we need everything to be above board in the board room with regards private dealings, conflicts, shares and contracts…
This follows our blog on directors’ responsibilities, focusing on individual directors and issues that often arise. We are often asked questions like:
- Can I have private dealings with a company I am a director of?
- What should I do if I have a conflict of interest?
- Are there any special rules about holding shares in a company I am a director of?
- Are there any special rules about my contract of employment?
Private dealings are allowed but you must comply with certain requirements. The company’s articles of association must permit such dealings and you must have disclosed all material facts to the board so that the arrangements may, if required by law, be formally approved (see below for a more information).
A company is usually able to loan money to you, provided the shareholders have approved the loan.
The shareholders must approve any substantial private deal between you or a person connected with you and your company. I bet I can guess what you are going to ask now… what constitutes substantial? Well, for example, selling assets worth more than £100,000 or 10% of the company’s net assets, whichever is lower, to the company or vice versa. Remember that in each case this includes someone connected with you. As the definition of the people who are connected with you is wide, you should take advice.
So what do you need to do in the situation of a conflict? Firstly, you need to know the types of director’s conflicts that could arise. There are two types: ‘situational’ conflicts; and ‘transactional’ conflicts.
A transactional conflict is one that arises due to a transaction that your company is to enter into. Such as where you, or a member of your family, own shares in another company with which your company is doing, or planning to do, business.
Situational conflicts arise where the company itself is not entering into any sort of transaction but rather the situation you are in that creates the conflict. So you find yourself in a situation, or could get into a situation, where you could exploit company property, information or hijack a company opportunity for personal gain.
It is important to know that if a conflict exists that does not preclude you from acting on it. In the case of situational conflicts, these are allowed if:
- The articles of association authorise them.
- They are authorised by a majority of the independent members of the board of directors. In other words, those with no direct or indirect interest in the matter. For a private company you must propose the conflict. However check the company’s constitution, as there must not be a prohibition to doing this. For a public company there must be express authority in the articles.
This situation is slightly different with transactional conflicts, in that they are allowed but you are legally obliged to declare any transactional conflict of interest to your fellow directors. You must therefore declare any personal interest you have (whether direct or through someone else) in any proposed transaction or arrangement to be entered into by the company and whether or not you are a party to it. Failure to declare any such personal interest is a breach of your duties as a director.
The declaration can be given by written notice, by a declaration at a board meeting, or by a general notice to the company that you are to be treated as interested in any future transactions or arrangements with named third parties.
The same can be said for an existing transaction or arrangement. In that, where you did not declare your interest in the proposed transaction or arrangement, you must declare to the directors any personal interest in the existing transaction or arrangement your company has already entered into. This must be done either at a board meeting or by general notice. A failure to declare your interest in an existing transaction is not a breach of duty but it is a breach of the Companies Act, making you liable to a fine.
Where you may have a potential conflict of interest you may not be allowed to vote on the decision. Although your company’s articles of association may permit you to vote provided that you have declared your interest. This may seem obvious but your duty, as a director, is to put your company’s interests first. Therefore if you do have a conflict then your decisions, as a director, must not be influenced by your personal interest.
Generally, you must not use your position to make private profits at the company’s expense. An example would be you should not accept benefits offered to you by a third party because you are a director.
A very obvious conflict of interest is where someone offers you a benefit because you are a director, or because of something you do (or do not do) as a director. In other words accepting a bribe. Accepting benefits in these circumstances is a breach of duty and would trigger the requirement to declare an interest as discussed above. There is however an exception to the above, if the benefit is authorised by the articles of association (or by the members in some other way), or if the acceptance of the benefit is unlikely to give rise to a conflict of interest.
We have been asked if there are special rules for a director holding shares in that company. Generally speaking, not usually. Although, the articles may stipulate sale of your shares in certain circumstances, such as if you leave the company. Before you buy any shares it is therefore advisable to check the company’s articles.
One other issue to be aware of is insider dealing which is illegal. This is where you make share profits using information not in the public domain and you are only aware of because of your position.
Finally, with regard to your employment contract ensure that the board of directors approved it. Where your term of employment guarantees you at least two years of employment then the shareholders must also have approved the contract. This includes contracts of less than two years where there is an option to extend it beyond two years. We would suggest you take advice on this point due to the special rules on the notice period to be given to shareholders before approval is given. Further, a copy of your contract must always be available for inspection by members.
When in doubt get advice as it is always better to be protected, so #GetProactive and #GetLawSavvy. If you want our help, give us a call.