Recently there have been discussions in the media concerning directors and conflicts of interest, but what is it that constitutes a conflict of interest and what do I do if I am a director and I find myself in a position of conflict?
DUTY TO DISCLOSE CONFLICTS OF INTEREST
Directors owe a ‘duty of loyalty’ to the company of which they serve as a director. Each member of the board of directors of a company owes a duty of care to the company. 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. The duty includes a duty to avoid conflicts and to not make secret profits from their fiduciary position as director of that company. Conflicts refer to circumstances where a director’s interest directly or indirectly conflict with his duty to the company of which he is a director.
The Companies (Amendment) Act, 2017 (“the Act”) codifies the 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”. This duty applies in particular 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. These statutory provisions supplement the general common law position and brings Jamaica into compliance with global standards and best practices.
A similar duty is imposed on directors of public bodies by the Public Bodies Management and Accountability Act, 2011 where a director who is directly or indirectly interested in any matter which is being dealt with by the board, shall disclose the nature of their interest at a board meeting and shall not take part in any deliberation of the board with respect to that matter.
While directors have a general duty to disclose conflicts or potential conflicts of interest, the Act specifically requires directors to disclose if they are (i) a party to a contract or a 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 must be done at the meeting in which the contract is first considered or the first meeting following the relevant director’s appointment. 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. Proper recording of the disclosure in the minutes of the meeting at which the disclosure is made is therefore imperative.
Following the disclosure of the conflict or potential conflict, the remaining directors may approve the matter giving rise to the circumstances. The directors’ approval 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. Where the company is private, the company’s constitution must not prevent it from approving a conflict or potential conflict of interest and where the company is public its articles of incorporation must allow for the directors to approve a conflict of interest. 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.
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.
WHAT GIVES RISE TO A CONFLICT OF INTEREST?
There are no convenient set of rules to determine which circumstances will or will not give rise to a conflict or potential conflict of interest. The determination of what amounts to a conflict or potential conflict will depend on the circumstances. The 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.
It may not always be clear to a director whether he is in a position of 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 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. The 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 to appreciate the nature and extent of the actual or potential conflict. 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 at Myers, Fletcher & Gordon, and is a member of the firm’s Commercial Department. Joanna may be contacted via Joanna.firstname.lastname@example.org or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice