Handling directors’ interests (including conflicts)

Company directors must make every effort to avoid situations where there may be a conflict (or potential conflict) of interests between the interests of the Company on the one hand and the director’s own personal, professional, and business interests on the other.

Directors must also not accept benefits from third parties by reason of their office or of doing or not doing anything as a director.

The existence of a conflict is not in itself unlawful, but directors of Irish companies are under a general duty to avoid conflicts wherever possible.

Directors must declare their interest the first time a matter comes up for discussion if they have a conflict of interest.

The board of a company must be fully informed of the extent of the conflict.

The extent of the information which a director needs to disclose is not defined, but disclosing too little may be a breach of a director’s duty.

Irrespective of such disclosure, the board has no inherent right to exempt any of its members from the rigours of a director’s fiduciary duties

Your constitution may contain guidance on what might be considered a conflict of interest and how your company has chosen to handle this kind of situation.

If your constitution doesn’t have a conflict clause you can change your constitution to allow for such a clause. 

You will find our template clauses useful.  

But be mindful that any changes to your constitution need to be made in a very specific way.

Check out our guide on changing your company constitution 

Directors might have a conflict of interest in a proposed transaction or in an existing transaction.

A declaration in relation to a proposed transaction or arrangement must be made before the company enters into it.

If the director fails to make such a declaration, then he will have committed a civil offence, meaning that the transaction may be unenforceable and the director must account for any profits.

A declaration in relation to an existing transaction or arrangement must be made as soon as is reasonably practicable.

Failure to declare an interest in an existing transaction or arrangement with the company is a criminal offence – although there are some limited exceptions, such as, for example, where the other directors ought reasonably to have been aware of the conflict (in which case, no formal declaration of it is likely to be needed).

If the director fails to make such a declaration, then he will have committed a criminal offence. 

Despite being a criminal offence, breach of this duty is unlikely to make the transaction unenforceable.

For example, a director might be directly or indirectly involved in or wish to be involved in, a matter that goes against the interests of the company.

Or, they could be directly or indirectly involved in, or wish to be involved in, a matter that potentially goes against the interests of a fellow director on your company’s board.

These situations could occur, for example, where a director may:

• be asking the board for a loan;
• own or have a material influence over a business that your company is planning to buy from, sell to, acquire, collaborate with or sue, for example;
• be a relative of or close to someone about whom the board needs to make a decision (e.g. a member of staff in respect of whom promotional or disciplinary action may be proposed)

In circumstances such as these, the director must declare their conflict of interest – or at the very least query whether they do, in fact, have one as early as possible so that the board can decide what to do for the best.

The director must excuse themselves from voting on any matter connected with that conflicting topic – unless the board decides otherwise and in spite of the concern, permits them to continue to have voting rights, having heard the full facts of the director’s conflict.

There’s no legal statutory definition of a conflict of interest.

To work out whether something’s going to be problematic, it’s helpful to treat ‘an interest’ as a very broad term – i.e. one that includes anything, or any connection, that could potentially divert a director’s mind from giving sole consideration to promoting your company’s success.

However, a director need not declare an interest in the following circumstances:

• if it cannot reasonably be regarded as likely to give rise to a conflict of interest;
• if the other directors are already aware of it (and for this purpose the other directors are treated as aware of anything of which they ought reasonably to be aware); or
• if it concerns terms of his service contract that have been or are to be considered by a meeting of the directors, or by a committee of the directors.

Templates relating to directors’ interests and conflicts can be accessed here.

For more background on directors’ legal duties and liabilities, check out our guide on this topic.

Must a director always avoid conflict?

The duty to avoid conflict and to disclose personal interests can be varied or dis-applied by the company.

A company will often foresee conflicts arising and excuse a director from his or her duties in certain respects, in its constitution.

The Act provides for some scenarios in which the company can pre-empt them by excusing the director, by providing that “save to the extent that the company’s constitution provides otherwise”, he or she can:  

• vote in favour of a contract in which the director has an interest;
• hold an office or place of profit in the company;   
• be counted in the quorum for a meeting involving the conflict, notwithstanding his or her interest; or
• be an officer of a company promoted by the director’s company. 

What do you need when handling a director’s conflict of interest?

1. Get written, dated, notification from the relevant director of their perceived conflict of interest

The relevant director needs to provide a letter of declaration of interest in relation to the specific transaction or arrangement that the company is proposing to enter into.

We have templates to help you with this.

For a proposed transaction declaration use our declaration of  director’s interest in proposed transaction template 

For an existing transaction declaration use our existing transaction template

2. Carry out a cross-check of what your constitution says about conflicts of interest by your directors

(They may contain directions that you mustn’t ignore)

Take a look at our template conflict clauses for a constitution, and you’ll see that other directors may be able to acknowledge and permit this conflict of interest, provided that the director is not counted in the quorum (the minimum number of directors to vote and pass a decision) on this particular matter.

3. Check if shareholder consent is required

In certain circumstances, before a director can be permitted to engage in or vote in relation to a conflicting interest, or before the board can engage a director who might have a conflicting interest, it may be necessary to get shareholder consent.

These circumstances would usually cover scenarios where for example:

• the company is considering making a requested loan to a director
• if the directors are prohibited by the articles of association to permit the conflict
• if the company is authorising a director’s service contract for a period exceeding two years

4. Raise the matter for decision in an Agenda for the board

5. Record the board’s decision and any relevant details in a Board resolution.

6. Record the declaration in Board Minutes

7. Maintain a register of interest 

How to handle a director’s conflict of interest

Simply follow the order of the elements listed above.

Once you have the declaration from the director, work through the order above – making sure that this is not something on which you’re going to need shareholder consent.

If you prefer not to hold a board meeting to discuss the potential conflict, you can simply circulate an explanation of the situation and attach a board resolution in draft form, requesting the views and agreement (or otherwise) of the other directors in writing by return.

Usually, this will need to be passed by the directors unanimously.

Assuming that the requisite number of directors have voted to acknowledge and permit the conflict, you can finalise the resolution and follow the decision-making/voting steps you’ve agreed i.e. the relevant director will either be permitted to:

• become or remain involved in the declared interest
• vote (or not) in board decision-making matters related to it

If the board does not vote to permit the conflict of interest – assuming it is a proposed interest – the director will not legally be able to engage in it.

Even if the director resigns in order to pursue this interest, it’s possible that, even after they’ve served their notice period, restrictive covenants in their service contract with you will prevent them from engaging in it for a designated time period.

To find out more about restrictive covenants check out our helpful guide

If the director has already engaged in that conflicting interest, they are probably in breach of their service contract with your business, and, as noted above, they may also have committed a criminal offence for not having declared it to your board.

Company Information on Conflict   

Proper recording of declarations of interest of directors at board meetings is vital to discharge the duty of disclosure owed by the directors to the company.

Transparency in decisions concerning conflicts is crucial, and limits should be imposed on any further actual or potential conflicts by having clear parameters around releases by the company from that duty.

The Act requires that a company establishes and maintains a register of directors’ interests in contracts to include copies of declarations made or notices given by directors that they are interested in certain contracts made with the company.

Any such notice must be included on this register, which is open to inspection, without charge, by any director, secretary, statutory auditor, member of the company or, upon request, by the Director of Corporate Enforcement.     

Conclusion

Conflicts of interest can undermine the trustworthiness of a director and also compromise the director’s independence, credibility and his or her effectiveness.  

It is essential that directors are aware of the extent of their duties to avoid conflicts, are familiar with the company’s constitution and with those policies and procedures of the company in respect of avoiding or managing directors’ conflicts.

If you don’t have a conflict of interest policy in place but want to do so, you’ll find our policy template helpful.