Directors have duties to avoid conflicts that may arise between their personal interests and those of the company that they manage. Nonetheless, it is not uncommon that in business, conflicts can arise. When they do, directors must give notice of their interest in a matter and identify the potential conflict. This article sets out why directors must disclose conflicts of interests, as well as when and how they can give other directors notice of a potential conflict of interest.

Duty to Disclose Conflicts of Interest

A director’s legal obligation to disclose conflicts of interests or any information that might raise a conflict arises from several sources:

  • under the Corporations Act 2001 (Cth) (the Act), directors must disclose when they have a material personal interest in a matter that relates to the affairs of the company;
  • under general law, directors have a duty to act in the best interests of the company and, therefore, must disclose conflicts of interests which may prevent them from properly fulfilling these duties; and
  • under the company’s constitution and shareholders agreement, there may be a stated obligation on directors to disclose personal interests in matters relating to the company and a restriction on them voting on such matters unless the other directors agree otherwise.

The Act does list out situations where a director does not need to disclose an interest. These include when the interest arises:

  • because the director is a shareholder of a company held in common with other shareholders; 
  • in relation to the director’s remuneration as a director of the company; and
  • merely because the director is a guarantor, or has given an indemnity or security for all or part of a loan, to the company.

However, there may be circumstances where you are unsure whether: 

  • you need to disclose a conflict of interest; or 
  • a personal interest is “material” enough to warrant disclosure.

In most cases, it is safer to simply give notice of the interest and seek the consent of other directors to allow you to vote on the relevant matter. 

When and How to Give Notice

You must give notice of a conflict or potential conflict at a directors meeting as soon as practicable after you become aware of the matter. You should disclose in appropriate detail the nature and full extent of your interest concerning the affairs of the company. 

If there is a directors meeting to vote on a matter in which you have a personal interest, you must ensure you disclose the interest before the directors all vote on that matter. The person taking minutes at the directors meeting must also record the disclosure. 

Instead of holding a directors meeting, the directors might approve the matter in which you have an interest by signing a written resolution. In this instance, you must ensure that the written resolution includes disclosure of your personal interest in the matter being decided. If the other directors consent to you voting on the matter regardless of your personal interest, the written resolution should also include an acknowledgement of this decision.

Giving Standing Notice

If a potential conflict will relate to the ongoing affairs of the company rather than just a single matter, you can give a standing notice to the other directors of the interest that you have. This allows you to notify the other directors of a potential conflict of interest before you are legally required to do so.

You can provide the standing notice: 

  • in a directors meeting;
  • in a written resolution of directors; or
  • by writing to each director individually to advise them of the interest (and tabling the notice at the next meeting of directors).

If you give a standing notice, you must be aware that it will cease to have effect when a new person becomes a director. This is because a standing notice is only effective if it has been given to all the directors. Once you notify the newest director of the interest, the standing notice takes effect again. 

If the nature and extent of your interest increase materially after you give the standing notice, the notice will also cease to have any effect and you must provide a new notice.

Key Takeaways

As a director of a company, you must give notice to the other directors of any personal interests you have in the affairs of the company which may lead to a conflict of interest. You should disclose the interest as soon as you become aware of it and definitely before the directors all vote on the matter in which you have an interest. A notice disclosing a personal interest can be a one-off notice in relation to a particular matter, or a standing notice that relates to the ongoing affairs of the company. If you have any questions or concerns regarding your duties as a director to disclose conflicts of interest, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

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