Previously we discussed Conflicts of Interests and the importance of declaring a suspected conflict to your fellow directors.
In this blog we will discuss how the remaining board members should deal with a declaration of conflict of interest.
When a board of directors is informed of a potential conflict, all reasonable steps must be followed to ensure that the company and its action are beyond reproach.
This includes discussing the issue, taking a vote and having the whole discussion is included in the minutes.
Identify, Prevent, Record
Once you have been made aware of a potential conflict, the Company’s Articles of Association should be reviewed. Companies incorporated before 1 October 2008 or Companies which do not use the model articles, may not allow fellow directors to authorise a conflict. If this is the case, information relating to the conflict must be provided to the members of the Company who will make the decision.
If directors’ authorisation is sanctioned, the conflicted director should explain the case to all present. Once explained, the director should remove him or herself from the discussion. How a director is removed is open to interpretation, but best practice would be for the director to leave the room where the meeting is taking place and have the exit formally noted in the minutes.
The remaining directors must decide whether or not the conflict should be authorised. The discussion should focus on what is in the best interest of the company, with each director making the decision based on how the facts presented conflict or agree with their duties to the company, i.e. to promote the success of the company, to act independently of other interests and to exercise reasonable care, skill and diligence.
Once everyone has had an opportunity to speak, the chairperson should call for a vote.
In order for the vote to take place a quorum must be reached. A quorum is the minimum number of directors which must be present for a vote to be deemed valid.
The Model Articles state that a quorum is two - and also prohibit a director from voting on or being counted in the quorum in relation to any matter in which they have a direct or indirect interest.
The above rules can be altered by ordinary resolution in advance of the meeting. However, if the model articles are valid then at least two directors, who are not subject to a conflict, are required to authorise a conflict of interest.
In the Minutes
As the discussion is being held at a directors meeting, minutes must be prepared by either the secretary or minute taker. In relation to a conflict of interest, it is important to take note of the following:
- Which director or directors are affected
- Type of conflict of interest (direct or indirect)
- If the conflict was previously known to the other directors
- An outline of the discussion
- If anyone withdrew from the discussion and if they stayed in or left the room
- How the remaining directors made the decision in the Company’s best interests
If the conflicted director prepared a written declaration, a copy of this should be kept with the minutes and placed on the Company’s minute book.
When a board of directors is informed of a potential conflict, all reasonable steps must be followed to ensure that the company and its action are beyond reproach. This includes discussing the issue, taking a vote and having the whole discussion is included in the minutes.
Please note that the above information is in respect of the Model Articles post 2008 and is specific to a limited company with at least three directors which is not part of a corporate group. If you require information specific to your particular company or structure please contact a legal advisor.
We have over 30 years of experience in incorporating, structuring and managing companies. Pearse Trust also has an extensive knowledge in compliance and company secretarial services, so that we can assist you with all your corporate governance requirements. Call us today on +353 1 634 9500 to discuss how we may be of service to you.