Duty to Avoid a Conflict of Interests

The issues are whether Sealy has breached the duty to avoid a conflict of interests and the duty not to accept benefits from a third party. Angela may have breached the duty to avoid a conflict of interests as well and additionally for not promoting the success of the company. The issue with Jack is that he may have breached the duty to promote the success of the company too. The last issue is whether Camille, Temperance and Zack can remove Sealy from the Board. As all six of them are shareholders, therefore whatever actions Angela, Jack and Sealy do affects them as well as the other shareholders. I will also assume that none of them have the majority shares for this question.

Sealy

The issue with Sealy is whether he can prevent himself from being removed from the Board. Sealy has many points with which he can defend himself and perhaps stop himself from being removed as director due to his clean business track record.

Three shareholders want to remove him from the Board and he has potential liabilities under the Companies Act 2006 (‘CA’). The issues he faces are the duty to avoid conflict of interests under s175 [1] and the duty not to accept benefits from third parties under s176 [2] . The case of Aberdeen Railway Co v Blaikie Bros [3] comprehends actual and potential conflicts. Here Sealy has ‘recommended’ and ‘persuaded’ the Board to buy a plot of land recently acquired by Sweets Ltd. An issue of conflict arises as there is the assumption that Sealy may have acted in interest of himself. Additionally, if he is acting in the interest of JR Ltd, then he is not acting in the interest of Sweets Ltd, therefore a conflict of duty must arise. This duty applies to a transaction between a director and a third party, such as the exploration of any property. The duty does not extend to a transaction between a director and his own company, in respect of which, different rule applies which requires a director to declare his interest to the other directors. Here there is no mention of whether Sealy has declared his interest in this buying of the land to either JR Ltd or Sweets Ltd. However, we assume that he acted in the interest of JR Ltd as he was awarded a bonus of £50,000 for assisting in the purchase. Transactions can now be authorized by the non-conflicted directors on the Board provided that certain requirements as listed in s175 (5) (6) [4] including who can participate and vote on such authorization are complied with.

Turning to the bonus that Sealy received, this comes under section 176 [5] of Directors Duties. This reinstates the existing rule known as ‘non profit’ in that a director is not permitted to accept a benefit from a third party by reason of (a) his being a director or (b) his doing or not doing anything as a director. Sealy has received a bonus from JR Ltd even though he is on the board of Sweets Ltd, and it was in his interest, and perhaps not the company’s to buy that particular plot of land.

The main problem with this issue is that Sealy is not accepting benefits from a third party, he is accepting from JR Ltd whom he is a director of. Additionally, the bonus was given as Sealy must have done a great job in securing this buy, and therefore he might deserve the bonus fully. However, depending on the Memorandum and Articles, if giving a bonus of this amount requires the approval of shareholders, then the Board will be liable. Consequently, he is a director at Sweets Ltd, therefore a breach does arise, as accepting the bonus from JR Ltd constitutes as a third party.

Angela

Angela could potentially be liable for not promoting the success of the company under s172 [6] , and also not avoiding a conflict of interest under s175 [7] . Section 172 [8] is one of the most controversial and the Act purports to end the debate that has continued over the meaning of “in the interests of the company”. [9] Lord Greene M.R stated that directors are required to “act bona fide in what they consider – not what a court may consider- is in the interests of the company, and not for any collateral purpose”. [10] Here it seems to show that Angela has not really thought about the interests of the company as the new staff are unqualified and will not benefit the company in the long term. The Act specifies that the director’s duty is to the company (s.170) [11] , and it is to promote the success of the company for the benefits of the members as a whole. ‘Success’ is not defined in the Act but as Angela has employed under qualified staff that are from DCR Ltd, another company which she is a director of, which is also an employment agency, it seems that her interests as a director of DCR Ltd have taken precedent over JR Ltd.

The other liability Angela will have to face is the conflict of interests. Angela is also a director at DCR Ltd which is an employment agency. Her bringing staff over to JR Ltd will help DCR Ltd in its success of finding employment for their members. Here there is potentially a conflict of interest under s175. [12] There cannot be unauthorized conflicts of the director’s personal interest with the interest of the company, not with the duties to the company. [13] However, Angela did disclose her interest [14] to the Board of JR Ltd, and the other directors authorized this matter. The common law indicates that any authorization must be ‘informed’ so that it can be effective. [15] Under s177 [16] Angela must have declared her interest to the other directors about the nature and extent of those interests, direct or indirect interest. Here we do not know the extent of her declaration as it was done over coffee in the morning. The form of disclosure is not in a list but it may be made at a meeting, by writing, or by general notice. Having coffee with all the directors may not be acceptable as generally minute taking is required. Under s180 [17] , the transaction is not liable to be set aside by virtue of the usual equitable rule requiring the consent of the company’s members. This is subject to the company’s constitution and whether the directors have complied with s177 [18] in the first place. If they have not then it will constitute as a breach of duty, and the remedies will be found in s178. [19]

Jack

The complaint from the shareholders about Jack is that he knew about the unqualified staff that Angela had hired, but due to his personal relationship with Angela kept quiet and failed to act. Here he may be in breach of duty to promote the success of the company because of his personal relationship potentially getting in the way. It is proposed that directors should promote ‘enlightened shareholder value’. [20] Even though directors are required to promote shareholder interests, the company’s success comes first, as the relationships and its performance is vital to the shareholders ultimately. It is covered by s172 [21] , and it aligns the interests of the company and its shareholders as a whole.

This duty can often cause debate as what Jack might have thought was successful to the company may not actually be reality. Angela may have convinced him that her staff was unqualified but great. The duty is subjective, and it is about whether the director honestly believed that his act or omission was in the interests of the company. [22] Here it was an omission, a failure to act in response to Angela’s unqualified staff. Even without his relationship with her, he perhaps should have acted. However, incompetence will not constitute a breach of fiduciary duty provided Jack honestly believed he was acting in the best interests of the company. [23] However, Angela, being the director who acted, may be more liable.

Camille, Temperance and Zack

These three shareholders want to remove Sealy from the Board. This is covered under s.168 [24] resolution to remove a director. A company may, by ordinary resolution, remove a director before the expiration of the director’s period of office, notwithstanding anything in any agreement between the company and the director. [25] However, special notice will be required of any resolution under s.168 to remove a director [26] and a copy of this must be sent by the company to the director concerned. [27] A resolution under s168 may propose the dismissal of more than one director. [28] Therefore if the three shareholders want to get rid of all three of the directors, it is possible to do so.

It does not give details in the question as to whether Sealy has included in the articles a clause entitling him to weighted voting in the event that the shareholders may want to remove him. [29] As this is a private company it is likely that there would be a weighted clause. We do not know how many shares the shareholders hold, and therefore it is unclear whether the three shareholders trying to get rid of Sealy will be able to do so. Previous versions of s168 [30] stated expressly that the right to dismiss a director existed notwithstanding any provision in the company’s articles (CA 1985, s303 (1)). [31] The absence of this express statement in CA 2006, s168 [32] , has led to speculation that articles may now take away the statutory right.

Removal of Sealy from the office may also be in breach of a contract between him and the company. It may breach the contract under which the person acts as director if the contract is for a fixed period which has not expired or if the director is entitled to a period of notice. This is the case here as Sealy has signed a contract for a guaranteed term of three years. However, if the provision for a minimum period of service or notice is only in the articles of the company, rather than in a separate contract with the director concerned, it may be held to be subject to any power of removal also provided by the articles, so that using that power of removal does not breach the contract. [33]

On the other hand, in Read v Astoria Garage Ltd [34] there was nothing in the contract under which the claimant served as managing director to give him a fixed term of employment or even a period of notice so that summary removal from his directorship did not cause any breach of the contract of appointment as managing director. For the purposes of the Employment Rights Act 1996, s98 (unfair dismissal) [35] , removal of a person from the board which causes loss of that person’s job, which can only be held if the person is a director, is a dismissal for a substantial reason. [36] In Sealy’s case, if he is found to have breached either his duty to avoid a conflict of interest or his duty not to accept third party benefits, then it is likely that he will be removed. Whether or not it is an unfair dismissal depends on all the circumstances.

Terminating the contract of employment may involve a large compensation payment. Accordingly, provision has been made to ensure that members can discover the terms of their directors’ contracts of service. [37] Compensation payments may be particularly heavy if a director has a fixed term contract which is the case here for Sealy and so fixed term contracts for terms in excess of two years are subject to approval by the members. [38] Here of course it is a three year contract and therefore Camille, Temperance and Zack will have to approve, as well as Angela and Jack, as they are shareholders as well.