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Conflicts of Interest Printable Version

How can directors recognise possible conflicts of interest?

Directors are frequently businessmen with drive and ambition that can be harnessed to the company's advantage. However, because directors are in a "fiduciary" relationship with the company, they must put the company's interests ahead of their own ambitions when a potential conflict arises. In most situations, it will be perfectly clear to a director whether he faces a potential conflict. However, sometimes the possibility of a conflict will be less obvious.

While there are no fixed categories of conflict, directors may wish to be particularly careful in situations where they are considering:

·       Contracts with the company where a director is directly or indirectly interested in the other party to, or the benefits arising from, the contract;

·       Decisions where they may be accused of acting for collateral or personal purposes rather than in the company's best interests, e.g. issuing shares to defeat a takeover bid or adding new directors to resist an attempt by other directors to establish control; or

·       Entering into transactions where they may be accused of taking personal advantage of either some business opportunity or some information which they become aware of as a result of being directors.

 

A director should be aware that his "fiduciary" duties are among the strictest known to the Trinidad & Tobago system of law. In some situations, it is possible for a director to become liable even if he acts honestly and in good faith. If faced with the possibility of a conflict, directors should exercise extreme caution. Where there is any doubt, they should seek professional advice as to whether they can proceed with the transaction and, if so, the procedures to be followed.

How can directors proceed where they recognise a potential conflict of interest?

The law tries to strike a balance between the businessman's freedom to pursue his own interests and the strict nature of a director's fiduciary relationship with the company. In doing so, it allows for a director to obtain an advantage despite any conflict, but only in a very controlled and defined manner. Basically, a director may keep such an advantage if:

·       He fully discloses the conflict;

·       He abstains from involvement in the appropriate mechanism by which the company may permit him to obtain the advantage; and

·       The company ratifies the relevant transaction.

 

In relation to contracts with the company where a director is directly or indirectly interested in the other party to, or the benefits arising from, the contract, the director is required to disclose the nature and extent of his interest. He must do so either in writing to the company or by requesting that it be entered in the minutes of meetings of directors.

 

The Companies Act requires the full disclosure of a director's interest to be made:

·       At the first board meeting at which the contract is considered; or

·       If the director becomes interested thereafter, at the first meeting after he becomes so interested; or

·       If the contract is one that, in the ordinary course of the company's business, would not require approval by the directors or shareholders, immediately after the director becomes aware of the contract or proposed contract.

 

These rules apply, with certain necessary modifications, to contracts in which officers who are not directors have an interest.

In relation to other types of transactions, it may be necessary for the full disclosure of the director's interest to be made to the shareholders and ratification obtained either at a general meeting or by unanimous shareholder agreement as disclosure to the board will not be sufficient.

How much must a director disclose?

A director must disclose the nature and extent of his interest. However, there is no exact formula to determine how detailed this disclosure must be as this depends in each case on the nature of the contract and the particular circumstances in which it arises. A director should be conscious that because of the fiduciary nature of the duty involved, his disclosure should be sufficient to allow the decision-makers to be fully knowledgeable of the real state of things. This will usually involve letting them know at least what his interest is and how far it extends. Where there is any doubt, directors should either err on the side of providing more detail than may be strictly necessary or obtain professional advice on the issue before proceeding.

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