conflicts of interest

Do company directors need to disclose any potential conflicts of interest when proposing new or updated contracts? In short, the answer is yes.

A recent Court of Appeal decision in Fairford Water Ski Club v Cohoon [2021] EWCA Civ 143, is a helpful reminder of the duties that directors owe to a company, in particular, whether a director has made a compliant declaration of his personal interest in a proposed transaction.

Conflicts of Interest in the Cohoon Case

The Facts

In 2006, two businesses operated by the side of a lake near Fairford in Gloucestershire:

  1. Fairfiord Water Ski Club Limited (the Company). Cohoon (C) was the chairman, and one of four directors.
  2. Craig Cohoon Watersports (the Partnership). C was a partner, together with his son.

The Partnership ran the business of the Company in return for a management fee and paid rent to the Company for the use of a building on the lake. Questions were raised at the Company’s 2006 AGM about its relationship with the Partnership and with C.

The following set of events then took place:

  • 23 December 2006 – C proposes new terms for increased rent and increased management fee;
  • 4 January 2007 – board meeting held. Minutes record that the meeting had been called for the purposes of discussing the relationship between the Company and the Partnership. Due regard was taken of the potential conflict of interest that arose due to C’s position and it was resolved that an agreement should be entered into with regard to the new arrangements;
  • 2007 AGM – C, as chairman, reported it had been concluded that rent should be £20,000 and a net figure of £15,000 to £20,000 would be paid as the management fee; and
  • 10 May 2007 – board meeting held. Minutes record that following earlier board discussions, the rent for 2007 would be £20,000 and the management fee would be £35,000. The arrangements continued for 10 years.

In 2017, the Company commenced an action claiming damages, including for C to repay £350,000 which was paid by way of management fee to the Partnership between 2007 and 2017, on the basis that C had failed to declare the nature of his interest in the proposed new management arrangement, as required by section 317 of the Companies Act 1985.

The Law

Companies Act 1985 (CA 1985)

This has been repealed and replaced with effect from 1 October 2008 by section 177(1) Companies Act 2006 (as below). However, this was the relevant law in place at the time in which the interest should have been declared.

The relevant section was section 317. Under case law it was apparent that there was no precise formula to determine the extent of detail required when directors declared an interest in a proposed contract – it depended in each case on the nature of the contract and the context in which the point arose, and that a declaration needed to be made even if the interest was already known to the other directors.

Companies Act 2006 (CA 2006)

Under the current law contained within CA 2006, company directors who are in any way, directly, or indirectly interested in a proposed transaction or arrangement with the company, must declare the nature and extent of that interest to the other directors.

The declaration must be made before the company enters into the transaction or arrangement and the disclosure must be full and frank. However, there is an express provision, which the CA 1985 did not have, to the effect that declaration is unnecessary if or to the extent that the other directors are already aware of the director’s interest or reasonably ought to be.

The Decision

The Judge at first instance in the High Court held that C had not complied with the requirement to declare his interest.

This decision was overturned on appeal to the Court of Appeal, and some of the reasons for allowing the appeal are discussed below.

The existence of ‘the potential conflict of interest’ had been expressly acknowledged in the minutes of the board meeting on 4 January 2007 and “due regard” had been taken thereof. Although the management fee had not yet been determined, it had been agreed that the current level was no longer realistic.

Additionally, the nature and, if necessary, the extent of C’s interest in the proposed new contract was already known to the other directors and so was obvious. As all concerned understood, C and the Partnership were one and the same. That being so, it was unnecessary to say any more. The context meant that the directors were fully informed of the real state of things.

Even if it were necessary to focus on the board meeting on 10 May 2007 at which the increased fee was finally agreed, that meeting could not be viewed in isolation from what had gone on before. There was plain reference back to the board meeting on 4 January 2007 that demonstrated the directors had well in mind what had been said there about C’s conflict of interest.

What does the judgement mean for directors?

The judgement is helpful even in cases where s177 CA 2006 is engaged.

Nature of the disclosure

The level of detail required depends on the context, but where the nature of the director’s interest is clear and obvious, very little may need to be said to make the directors fully informed of the real state of things.

Timing of making the disclosure

A declaration of interest should be made before the company enters into the transaction or arrangement and should be made without delay.

It is suggested that the word “proposed”, in section 177(1) CA 2006 (as much as in section 317(1) CA 1985), contemplates that the terms of the transaction or arrangement may not necessarily have been finally settled by the time at which the declaration is made, provided the “basic structure” is clear.

It is important to seek independent legal advice if you are a director proposing to enter into a transaction which may give rise to a potential conflict of interest, to avoid any action being taken by the Company against you.

To discuss this with a legal advisor, please get in touch and our team would be happy to assist.