Director’s conflict of interest

Directors of a company should at all times be guided by the interest of the company. What if directors have to make decisions that involve their own personal interests? What interest prevails and what is a director expected to do in such a situation?

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When is there a conflict of interest?

When managing the company, the board might sometimes take a decision that also provides an advantage to a specific director. As a director, you have to look after the company’s interests and not your own personal interest(s). There is no immediate problem if a decision taken by the management board results in a director benefiting personally. This is different if this personal interest conflicts with the interests of the company. In that case, the director may not participate in meetings and decision-making.

In the Bruil case the Supreme Court ruled that there is a conflict of interest if the director is not able to safeguard the interests of the company and its affiliated enterprise in such a way that an integer and unbiased director can be expected to do so due to the presence of a personal interest or of another interest that is not parallel to that of the legal entity.[1] In determining whether there is a conflict of interest all relevant circumstances of the case must be taken into account.

There is a qualitative conflict of interest when the director acts in different capacities. This is the case, for example, when the director of a company is the counterparty to the company at the same time because he is also a director of another legal entity. The director must then represent several (conflicting) interests. If there is a pure qualitative interest, the interest is not covered by the conflict of interest rules. This is the case if the interest is not intertwined with a personal interest of the director. An example of this is when two group companies enter into an agreement. If the director is a director of both companies, but is not a(n) (indirect) shareholder or doesn’t have another personal interest, there is no qualitative conflict of interest.

What are the consequences of the presence of a conflict of interest?

The consequences of having a conflict of interest have now been laid down in the Dutch Civil Code. A director may not participate in deliberations and decision-making if he has a direct or indirect personal interest that conflicts with the interests of the company and its affiliated enterprise. If as a result no board decision can be taken, the decision shall be reached by the supervisory board. In the absence of a supervisory board, the decision shall be adopted by the general meeting, unless the statutes provide otherwise. This provision is included in section 2:129 paragraph 6 for the public limited company (NV) and 2:239 paragraph 6 of the Dutch Civil Code for the private limited company (BV).

It can not be concluded from these articles that the mere presence of such a conflict of interest is attributable to a director. Nor can he be blamed for ending up in that situation. The articles only stipulate that the director must refrain from participating in the deliberations and decision-making process. It is therefore not a code of conduct that leads to punishment or prevention of a conflict of interest, but only a code of conduct that prescribes how a director should act when a conflict of interest is present. The prohibition of participation in deliberations and decision-making implies that the director concerned may not vote, but he can be request for information prior to the board meeting or the introduction of the item on the agenda of the board meeting. Violation of these articles shall, however, render the resolution null and void pursuant to article 2:15 section 1 sub a of the Dutch Civil Code. This article states that decisions are voidable if they are in conflict with provisions governing the formation of decisions. The action for annulment can be instituted by anyone who has a reasonable interest in compliance with the provision.

It is not only the duty of abstinence that applies. The director shall also provide information regarding a possible conflict of interest in a decision to be taken to the management board in a timely manner. Furthermore, it follows from article 2:9 of the Dutch Civil Code that the conflict of interest must also be notified to the general meeting of shareholders. However, the law does not clearly state when the obligation to report has been met. It is therefore advisable to include a provision to this effect in the statutes or elsewhere. The intention of the legislator with these laws is to protect the company against the risk of a director being influenced by personal interests. Such interests increase the risk that the company will suffer a disadvantage. Section 2:9 of the Dutch Civil Code – which regulates the internal liability of directors – is subject to a high threshold. Directors are only liable in case of seriously culpable conduct. Failure to comply with legal or statutory conflict of interest rules is a serious circumstance which in principle leads to directors’ liability. A conflicted director can be severely reproached personally and can therefore in principle be held liable by the company.

Since the amended conflict of interest rules, ordinary representation rules are applicable to such situations. Sections 2:130 and 2:240 of the Dutch Civil Code are particularly important in this respect. On the other hand, a director who on the basis of the conflict of interest rules is not allowed to participate in the deliberations and decision-making, is authorised to represent the company in the legal act implementing the decision. Under the old law, a conflict of interest led to a restriction in the power of representation: that director was not allowed to represent the company.

Conclusion

If a director has a conflicting interest, he must refrain from deliberating and decision-making. This is the case if he has a personal interest or an interest that does not run parallel with the interest of the company. If a director does not comply with the obligation to abstain, he may increase the chance that he can be held liable as a director by the company. Furthermore, the decision can be annulled by anyone who has a reasonable interest in doing so. Despite having a conflict of interest, the director may still represent the company.

Do you find it difficult to determine whether there is a conflict of interest? Or are you in doubt as to whether you should disclose the existence of an interest and inform the board? Ask the Corporate Law lawyers at Law & More to inform you. Together  we can assess the situation and the possibilities. On the basis of this analysis, we can advise you on the appropriate next steps. We will also be happy to provide you with advice and assistance during any proceedings.

[1] HR 29 juni 2007, NJ 2007/420; JOR 2007/169 (Bruil).

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