Articles of Association and Conflicts of Interest

October 2008

Article of Association & Directors' Conflicts of Interest

The Companies Act 2006 introduced changes in relation to directors' conflict of interest that consequently affect the Articles of Association of companies generally.

Every company must be run in accordance with its Articles of Association. The Articles govern the internal functioning of the company and set out the procedures that must be followed in order to implement the decisions taken by the members and the board.

The 2006 Act allows for more flexibility than the old regime in that a director's conflict of interest can be authorised by the board of directors, provided that the authorisation is given by non-conflicted directors who must also be able to form a quorum. On the other hand, under the old rule, such authorisation could only be given by the shareholders.

Thus, from 1 October 2008 if a conflict raises it can be authorised in advance either by the shareholders or by the directors.

Shareholders Authorisation

Shareholders can authorise an actual or potential conflict of interest by an ordinary resolution, that is more than 50% support from those shareholders voting. This can be achieved by a vote at a general meeting or by getting agreement to a written resolution.

When shareholders ratify a conflict of interest (that is, authorise a conflict after it has arisen) the votes of any shareholder who is also an interested director won't be counted. Nor will the votes of any shareholder who is connected with an interested director. However, where the vote is to authorise a conflict in advance, an interested director who is also a shareholder is able to participate in the shareholder vote.

Directors Authorisation

From 1st October 2008 every company will have to have at least one director who is a natural person and all appointed directors must have a minimum age of 16 years old by1st October 2008.

It must be noted that directors can only authorise conflicts in advance, but conflicts can still be ratified after the event by the shareholders.

Public Companies
In order for the directors of a Public Company to be able to authorise conflicts of interests the Articles of Association must contain a specific authority for them to do so. In other words, it means that to avoid the need for shareholder approval of conflicts, a plc's Articles will have to be amended by a special resolution.

Private Companies existing prior to 1 October 2008
Private Companies existing prior to 1 October 2008 are effectively in the same position as Public Companies, they either need to amend their Articles of Association to allow for director authorisation, or they can pass an ordinary resolution to the same end.

Thus both public companies and private companies existing prior to 1 October 2008 must either pass a shareholder resolution bestowing power upon the directors to authorise conflicts, or they must amend their Articles of Association to include provisions dealing with conflicts of interest and to remove any provisions which would invalidate board authorisation of conflicts. Only then can they rely on the provisions of the 2006 Act allowing the directors to authorise conflicts, provided that the conflicted director does not vote and is not counted in the quorum.

Private Companies incorporated on or after 1 October 2008
For Private Companies incorporated on or after 1 October 2008 the position is different. Only for these companies the directors' power to authorise a conflict implied without the need for specific wording in the Articles of Association.

Hence, Companies incorporated on or after 1 October 2008 need not pass a shareholder resolution, but would be wise to amend their Articles of Association to include provisions dealing with directors' conflicts of interest and certainly should remove from the articles any provisions which would prevent the directors from authorising conflicts, if they want to avail themselves of the provisions of the 2006 Act.

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