Please enable JavaScript.
Coggle requires JavaScript to display documents.
Duty to declare interests in transactions - Coggle Diagram
Duty to declare interests in transactions
Directors have a general duty under s. 175 to avoid conflicts of interest. However, that general duty does not necessarily preclude them from having a direct or indirect interest in a transaction or arrangement that the company has entered into or is proposing to enter in
Interests in proposed or existing transactions or arrangement
Directors have a duty to declare any interests that they have in
Any proposed transaction or arrangement with the company
Any existing transaction or arrange with the company
It is almost inevitable that directors will have an interest in some transactions that the company enters into
The duty of directors under s.177 to declare their interests in any proposed transaction or arrangement is an adaption of one of the original fiduciary duties of directors under the common law. The original rule used to require directors to disclose such interests to the members in general meeting and for the potential conflict to be authorised by the members. This often proved to be impractical and companies began to adopt articles that modified these rules
The current duty is based on typical provisions previously found in articles
As it is a civil duty, it gives rise to potential civil remedies in the event of a brach
The company can force the director who failed to disclose the interest to repay any profits they made from the truncation or the company has the option to rescind the transaction
The duty to declare interests in existing transactions or arrangements gives rise to potential criminal penalties in the event of a breach. The max penalty is £5000
Under CA2006 it is not necessary for the board or the company to authorise any conflict of interest that may arise from a director's interest in a proposed or existing transaction or arrangement as long as the director has declared the interest
Declaration of interest
The declaration must be made to the other directors before the transaction is entered into
If there are no other directors, no declaration need be made
Can be made in a variety of ways, including at a meeting of directors, by general notice to the company or wrtitten notice to the other directors
The procedures for each method are designed to ensure that any declaration of interest is brought to the attention of the other directors before they or the company enters into the proposed transaction or arrnagement
Armed with the knowledge that a fellow director has an interest, it may make the board more cautious about approving the proposal and might wish to review it
Directors also need to declare their interests so that it can be decided whether they should be allowed to participate in the decision
Articles usually contain rules as to whether or not a director can partake in the decision
In listed articles the default position is usually that the interested director cannot vote or be counted in the quorum on that matter although they commonly make certain exceptions to that rule
One of the reasons directors need to declare their interests in existing transactions is to ensure the board is aware of any conflicts which may influence a director's opinion on whether for example the company should terminate an existing contract or seek to find a new supplier. It may not be sensible for the board to put a person who has a material interest in a contract in charge of managing that contract. If the company entered into the contract before the director joined the board, it would not otherwise know about these interests in existing transactions
Another reason for the rule is that it creates a criminal sanction in the most serious cases where a director has failed to disclose an interest in a proposed transaction. There is no criminal penalty for failing to disclose an interest in a repurposed transaction if the company never enters into that transaction. However an offence is technically commited
Under both s.177 and s.182 directors are not required to make a declaration where
they are not reasonably aware of the interest
Not reasonably aware of the transaction or arrangement in question
If it cannot reasonably be regarded as likely to give rise to a conflict of interest
If, or to the extent that, the other directors are already aware of it
If, or to the extent that, it concerns the terms of their service contract
Related party transactions
The Listing Rules include provisions that may require certain transactions in which one or more directors have an interest to be approved by the shareholders in advnace
They only require shareholder approval if the result of any of the class tests for the transaction is 5% or more