Understanding Conflicts of Interest and Declarations under Companies Act 2006, Study notes of Business

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Legal01#18503935v1[SXS] Guide to Directors’ Conflicts of Interest and Declarations of Interest following implementation of the Companies Act 2006 Legal01#18503935v1[SXS] CONTENTS Clause Heading Page 1 Introduction ........................................................................................1 2 The duty to avoid conflicts of interest .........................................................2 3 The duty to declare a personal interest arising in relation to a transaction or arrangement between the director and the company ........................................5 4 The duty not to accept benefits from third parties ..........................................6 5 Authorisation of situational conflicts and management of conflicts of interests .........7 6 Declarations of interest ...........................................................................9 Appendix 1 .............................................................................................. 10 Directors’ General Duties under the Companies Act 2006 ......................... 10 Appendix 2 .............................................................................................. 11 Connected persons and interests ....................................................... 11 Appendix 3 .............................................................................................. 13 Pro forma Declaration of Interests [and Authority] .................................. 13 Legal01#18503935v1[SXS] 3 below for further information on authorisation of situational conflicts and management of conflicts of interest). Examples of where situational conflicts may arise are: • if a director of the company is a competitor of the company; • if a director of the company is a major shareholder in the company; • if a director of the company is a customer of, or a supplier to, the company; • if a director of the company owns property adjacent to the company’s property, the value of which could be affected by the activities of the company; • if a director of the company has an advisory relationship (for example, financial or legal) with the company or a competitor of the company; • if a director of the company is a director of the company's pension trustee company; • if a director of the company is interested in taking up an opportunity that had been offered to, but declined by, the company; • if a director of the company is appointed as a director of another company which competes with, is a major shareholder in, is a customer of or a supplier to, owns property adjacent to, or has an advisory relationship with the company; • if a director of the company is appointed as a director of another company that is interested in taking up an opportunity that had been offered to but declined by the company; • if a director of the company is a shareholder in a competing company or a company that is customer of or a supplier to the company; • if a director of the company is nominated to represent the company on the board of a joint venture company in which the company has invested; • if a director of the company sits on the board of a statutory or non-statutory body which has a relationship with or advises the company or one of its subsidiaries; • if a director of the company is in a situation where he can make a profit as a result of his directorship, whether or not he discloses this to the company; or • if a director of the company is a director of another company which the company is proposing to acquire or which is proposing to make an offer for the company. In each example, reference to a “director” includes the director’s connected persons (see further Appendix 2 below). Legal01#18503935v1[SXS] 4 Legal01#18503935v1[SXS] 5 2 The duty to declare a personal interest arising in relation to a transaction or arrangement between the director and the company Conflicts arising in these circumstances are covered by two separate provisions of the Act: • under section 177, a director has a duty to declare an interest, either direct or indirect, in a proposed transaction or arrangement with the company (a transactional conflict); and • under section 182, a director must declare an interest, either direct or indirect, in an existing transaction or arrangement with the company, unless he has already declared that interest under section 177, unless, in either case, the interest cannot reasonably be regarded as likely to give rise to a conflict of interest or if, and to the extent that, the other directors are already aware of it or ought reasonably to be aware of it. Failure to declare a transactional interest may give rise to a civil claim against a director of the same kind as described in section 1 above. In addition, failure to declare an interest in an existing contract under section 182 is a criminal offence punishable by a fine. A situation in which a director has or possibly may have a conflict of interest that initially falls within section 175 (a situational conflict) may evolve into a matter failing within section 177 (a transactional conflict), in which case section 175 will no longer apply. For example, if a director of the company is also on the company’s list of preferred suppliers, that relationship may fall within section 175, but the proposed entry into of a supply contract between the company and the director would then fall within section 177. The declaration of an interest in a proposed transaction (governed by section 177) must be made in advance of the transaction being entered into, whereas the declaration of an interest in an existing transaction or arrangement (governed by section 182) must be declared as soon as reasonably practicable, in both cases to the other directors, either at a board meeting or by a written notice. Care may be needed if a declaration is made at a meeting where not all other directors are present; written notice to absent directors may be required (possibly in the form of copy board minutes). Notice may be given by email to directors who have agreed to receive notices in this way. The interested director will need to provide the other directors with sufficient details of the nature and extent of his personal interest as are necessary for them to assess and to decide how to address the matter. Legal01#18503935v1[SXS] 8 relation to the company’s affairs in circumstances where to do so would amount to a breach of that confidence; • confirmation from the director that any confidential information of the company relating to the situational conflict will not be disclosed to any third party; • an acknowledgement that the interested director will not be in breach of duty when the relevant situation arises due to his being a director, secretary or shareholder of any group company of the company; and • where the interested director takes mitigating action when the actual relevant situation arises by agreeing not to receive related board papers or other information and not to attend board discussions (or participate in votes on the relevant matter) he will not be in breach of duty in respect of the relevant situation. Legal01#18503935v1[SXS] 9 5 Declarations of interest Each board of directors will need to consider the situation of each of its directors to determine if there are: • any actual or potential situational conflicts that need to be disclosed to and authorised by that board; and/or • any direct or indirect interests in proposed or existing transactions with the company. Directors will therefore be requested to complete declaration of interest [and authority] forms and return them to the [Company Secretary]. The forms will be in three parts: Part 1 will list the directorships and other relevant situations of which the company is already aware. Part 2 is for the director to add any directorships and other relevant situations not listed in Part 1, including the nature and extent of any direct and indirect interest and any background information that the director considers may be relevant to the board’s assessment. Part 3 is for the director to notify of any direct or indirect interests in proposed or existing transactions with the company. This can be a general notice that the director is also a director or shareholder in another organisation or otherwise is directly or indirectly interested in it, and should be regarded as interested in any transaction or arrangement with that organisation. Again, the director should give details of the nature and extent of the interest. A personal interest of a director may include an indirect interest arising from the interest of a connected person (see section 2 below). Directors will need to consider carefully whether any of their connected persons hold positions of which they are aware that: (a) conflict or possibly may conflict with the interests of the the company leading to them being in breach of section 175 of the Act, unless declared to and authorised by the board; or (b) mean that the director is directly or indirectly interested in a proposed transaction or arrangement which must be declared to the directors in accordance with section 177 of the Act before such transaction or arrangement is entered into; or (c) mean that the director is directly or indirectly interested in an existing transaction or arrangement which must be declared to the directors in accordance with section 182 of the Act as soon as reasonably practicable. Appendix 2 contains guidance to assist directors in identifying connected persons and interests. If a director is in doubt as to whether an interest needs to be included he should seek guidance from the [Company Secretary]. Legal01#18503935v1[SXS] 10 Appendix 1 Directors’ General Duties under the Companies Act 2006 s.171 Duty to act within powers (in accordance with company’s constitution) s.172 Duty to promote the success of the Company A director must act in a way he considers in good faith, would most likely promote the success of the Company for the benefit of its members as a whole, and in doing so have regard to: (a) the likely consequences of any decision in the long term; (b) the interests of the Company’s employees; (c) the need to foster the company’s business relationships with suppliers, customers and others (d) the impact of the company’s operations on the community and the environment (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company. s.173 Duty to exercise independent judgment. s.174 Duty to exercise reasonable care, skill and diligence. s.175 Duty to avoid a conflict of interest. s.176 Duty not to accept benefits from third parties. s.177 Duty to declare interest in proposed transaction or arrangements. s.182 Duty to declare interests in existing transactions or arrangements. The section 175, 176, 177 and 182 duties are not infringed if the interest, or in the case of section 176 the acceptance of the benefit, cannot reasonably be regarded as likely to give rise to a conflict of interest. Legal01#18503935v1[SXS] 13 Appendix 3 Pro forma Declaration of Interests [and Authority] In order to assist you in complying with sections 175, 177 and 182 of Companies Act 2006 please list any existing interests in the declaration form below and return to us Part 1 – Direct or indirect interests which conflict or possibly may conflict with the interests of the proposed Company to assume the activities of The Greater Birmingham and Solihull Local Enterprise Partnership Limited Name of entity Nature and extent of conflict/possible conflict (e.g. yours or connected persons’ directorship/shareholdings etc) Gee & Co, Holborn Hill, B7 (engineering company) Business Development Manager (retired October 2016) Solihull Metropolitan Borough Council, Council House, Manor Square, Solihull B91 3QB Leader of Solihull MBC Birmingham City Council Spouse is a Social Worker for Birmingham CC Solihull Metropolitan Borough Council Spouse is Councillor (Conservative) at SMBC Part 2 - Directorships and other relevant situations not listed in Part 1 Name of entity Nature and extent of Interest (position e.g. yours or connected persons’ directorship/shareholdings etc) As above. Legal01#18503935v1[SXS] 14 Part 3 – Direct or indirect interests in existing transactions or arrangements Existing or proposed transaction or arrangement with the Company Nature and extent of Interest (position e.g. yours or connected persons’ directorship/shareholding etc) As above. I acknowledge that as at the date entered below, the above interests exist and that I will inform the Secretary in the event that there is any change in my circumstances which mean that the declarations above become inaccurate or incomplete. I also acknowledge that it is my duty to avoid a situation that could conflict with the interests of the companies of which I am a director. Should I become aware of any additional interest(s) that may possibly conflict with the company/companies of which I Legal01#18503935v1[SXS] 15 am a director, I will disclose that interest or interests and seek prior authorisation from my fellow directors. In relation to declarations of interest by other directors of companies of which I am a director made by notice in writing to me in accordance with section 184 Companies Act 2006 I hereby irrevocably: • agree to receive such notices by electronic means at rsleigh@solihull.gov.uk (or such other email address as I shall notify to Mark Rogers in writing from time to time); and • authorise the Company Secretary to receive such declarations on my behalf, on the understanding that copies will be forwarded to me in due course. Signed: …………………..………………………………………. Print Name: ROBERT K SLEIGH …………………..………………………………………. Date: 27 October 2016 …………………..……………………………………….