Changes to the law relating to directors and conflicts of interest come into force on 1st October 2008 as a result of the Companies Act 2006 (the Act).

The existing “common law” restricts a director from acting in a certain way if a conflict arises. However the new “statutory law” requires a director to act positively to avoid a situation in which he/she has or can have a direct or indirect interest which conflicts or possibly may conflict with the company’s interests. The duty applies in particular to the exploitation of property, information or opportunity (but not to a conflict arising in relation to a transaction or arrangement with the company – which is covered elsewhere in the Act). If a director breaches the no-conflicts rule, he/she may have to account to the company for gains or profits which he makes.

There are certain circumstances when the new duty will not be breached, including:

• if the company’s shareholders have given prior consent; or

• the directors (with no interest themselves in the circumstances in question) have given prior authorisation.

The latter exception is a significant and helpful change to the current law. However, to be sure that a company can take advantage of the exception, a review of the company’s articles should be carried out to ensure there are no overriding requirements for shareholders’ consent.

It should be stressed that this note is intended as general guidance only and that each situation of conflict or potential conflict should be considered on its facts. Lupton Fawcett LLP can advise companies, directors or shareholders on the new law and on any particular circumstances where a conflict may have arisen or could arise.

Posted: September 1st, 2008 under Corporate Finance.
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