Feeling conflicted? The duties of a company’s board of directors
THE appointment to the board of directors of a company is usually a prestigious event. The status, however, comes with several legal duties, including the duty to disclose a conflict of interest. But what exactly does this duty involve? What constitutes a conflict of interest? What do I do if I am a director and I find myself in a position of conflict?
DUTY TO DISCLOSE CONFLICTS OF INTEREST
A director owes a fiduciary duty of ‘care and loyalty’ to the company they serve as a director. In discharging this duty, the Companies Act states that a director may have regard to the interests of the company’s shareholders and employees and the community in which the company operates. Among amendments made in 2017 to the Companies Act was the codification of this fiduciary principle of loyalty; imposing a duty on directors “to avoid circumstances which, whether directly or indirectly, constitute a conflict of interest or may result in a conflict of interest with the interests of the company”. The amendment provides that it specifically applies to “the exploitation of any property, information or opportunity”, and it is immaterial whether the company could take advantage of the property, information, or opportunity.
WHAT GIVES RISE TO A CONFLICT OF INTEREST?
A conflict arises where a director’s personal interest, directly or indirectly, conflicts with his duty to the company of which he is a director. These statutory provisions supplement the general common law position and brings Jamaica into compliance with global standards and best practices.
There is no convenient set of rules to determine which circumstances will or will not give rise to a conflict or potential conflict of interest. An actual conflict refers to circumstances that are or could be perceived to be a conflict of interest and a potential conflict refers to a set of circumstances that it is reasonably probable actual conflict will come into play. However, the determination of what amounts to a conflict or potential conflict will depend on the circumstances of each case. The Companies Act does, however, specifically prohibit accepting a benefit from a third party by virtue of being a director or doing or not doing an act as a director where the acceptance of the gift could reasonably be regarded as a conflict. One should, however, keep in mind that it is not necessary to prove an actual conflict of interest: it is only necessary to prove there is a real possibility of a conflict. Therefore, good practices indicate that where a director has any connection or interest whatsoever in any matter, it is best to disclose it to the board of directors as soon as practicable, not to vote and ensure the disclosure is recorded in the minutes.
WHAT DOES A DIRECTOR DO?
While directors have a general duty to disclose conflicts or potential conflicts of interest, the Companies Act specifically requires directors to disclose if they are:
(i) a party to a contract proposed contract
(ii) director or officer of any body or has an interest in any body that is a party to a contract or proposed contract or
(iii) an associate of a person who is party to a contract or proposed contract or has an interest in any body that is a party to a contract or proposed contract.
The required disclosure of a director’s interest in a contract or proposed contract must be done at the meeting in which the contract is first considered, or a the interest first arises or the first meeting following the relevant director’s appointment. The contract in which the relevant director has an interest in may otherwise be approved by the board; however, the relevant director is not to be present during the proceedings of the board in connection with that approval. A record of said contract should be kept at the registered office of the company.
The director’s disclosure shall include the nature and extent of the interest and should be made in writing or entered in the minutes of the meetings of directors. The Companies Act does not specify the extent of details to be provided in when making a disclosure and so the nature of information required will vary with the facts of each case. The disclosure, however, should be sufficient to allow the board to have all relevant facts, including the position the person holds that has put them in actual or potential conflict, to appreciate the nature and extent of the circumstances and to determine if it can reasonably be regarded as likely to give rise of a conflict of interest. Proper recording of the disclosure in the minutes of the meeting at which the disclosure is made is therefore imperative and the relevant director should ensure that this is properly recorded.
A director may also disclose his interest by declaring his position as director, officer or his interest in another body in a general notice to the directors of the company and that he is to be regarded as ‘interested’ in any type of contract with that body.
Where a director has not disclosed his interest in a proposed or existing material contract in accordance with the Act, the court may, upon application by the company, set aside the contract on the terms the court thinks fit. Case law indicates that this may include requiring a director who fails to disclose to account for any benefit he has received.
Following the disclosure of a general conflict or potential conflict, the remaining directors may approve the matter giving rise to the circumstances. In making this decision, the remaining directors should, however, be cognisant of their own fiduciary duty to act in the best interest of the company. The approval of the board is only effective where a quorum is met without counting the director in question and the director in question is not involved in any voting concerning the matter giving rise to the potential or actual conflict or it would have been agreed to if the director in question’s vote had not been counted. Where the company is a private company the company’s constitution must not prevent it from approving a conflict or potential conflict of interest and where the company is a public company its articles of incorporation must allow for the directors to approve a conflict of interest. Where the company has any governance policies which address conflicts of interest, these should be taken into consideration as well. The obligations to avoid conflict and to make disclosures do not apply where the company has only one director and only one shareholder, who is the same individual.
It may not always be clear to a director whether he is in a position of actual or potential conflict, and it is possible for a director to become liable even when he has acted honestly and in good faith. It is therefore prudent for a director who is faced with the possibility of a conflict, to carefully consider his own personal circumstances, to exercise caution and if in doubt, to seek professional advice or consult with the company’s secretary as to whether they can proceed with the transaction or the disclosure to be made. Where there is any doubt, directors should take external legal advice and err on the side of caution by disclosing more detail than may seem to be strictly necessary for these purposes.
Joanna Marzouca is an associate in Myers, Fletcher & Gordon’s Commercial Department. She may be contacted via joanna.marzouca@ mfg.com.jm or www.myersfletcher. com. This article is for general information purposes only and does not constitute legal advice.