Directors are legally obliged to avoid conflicts that may arise between personal interests and those of the company. Nonetheless, conflicts can and do arise. When they do, directors must disclose such information. Directors can also give notice of information that could at some point become a conflict of interest. This article discusses a director’s obligation to disclose conflicts of interest and ability to give notice of an interest.
Duty to Disclose Conflicts of Interest
In equity, a person with fiduciary obligations (such as a director in a company) must disclose conflicts of interest or any information that might raise such a conflict. Similarly, the Corporations Act 2001 (Cth) (‘the Act’) also requires directors to disclose material personal interests.
Section 191 of the Act requires directors to notify other directors of any material personal interest in a matter that concerns the affairs of the company.
Whether an interest is material is a question of substance and judgment. A key determinant is whether the interest has the capacity to affect a director’s ability to discharge their fiduciary duty.
However, Section 191 of the Act details numerous situations where a director need not disclose an interest. These include when the interest arises because:
- A director is a member of a company and is held in common with the other members of the company;
- It relates to a director’s remuneration as a director of the company;
- It relates to a proposed contract still subject to approval by members, and the contract will not impose any obligations on the company unless it is approved by members;
- The director has provided security, given indemnity, or is guarantor for a loan to the company; or
- The director has a right of subrogation concerning a guarantee or indemnity referred to immediately above.
This list is not exhaustive. Sections 191(2)(a – d) of the Act outline further examples of when disclosure is unnecessary.
Circumstances of Disclosure
A director must give notice of this conflict or information that could suggest a conflict at a director’s meeting as soon as practicable after they become aware of the matter. The minute taker must also record it in the formal minutes of the meeting.
A director needs to be sure that they disclose in appropriate detail the nature and full extent of their interest and its relation to the affairs of the company.
However, be aware that Section 191 does not apply to sole directors of proprietary companies.
Giving Standing Notice
The commercial nature of being a director may mean that potential conflicts do arise. Section 192 of the Act gives a director the right to give standing notice to other directors of any interest they have in a matter. This right to give standing notice means a director may notify other directors of a potential conflict of interest before they are legally required to do so.
At the time of notice, that interest need not relate to the affairs of the company. In other words, the interest has not yet become a material personal interest regulated under Section 191.
Circumstances of Notification
A director can provide standing notice regarding a potential interest to the other directors at a director’s meeting, either orally or in writing. The minute taker must record it.
Alternatively, they can write to each director individually advising them of the interest. According to the Act, the notice only becomes standing when a director has notified all the others. At the next director’s meeting, the meeting must table the notice. The minutes should also record the notice.
A secretary is also able to give this notification of the director’s interest.
However if a director chooses to notify other directors, the notice must detail, and the minutes reflect, the nature and extent of the interest.
The notice takes effect upon delivery. However, standing notice will cease to have any effect when and if a new person (who was not a director at the time of notification) becomes a director. However, if the director notifies the newest member of the interest, the standing notice takes effect again.
Also, if the nature and extent of a director’s interest increase materially after notice, the notification itself ceases to have any effect.
If you have any questions or concerns regarding your duties as a director, get in touch with LegalVision’s qualified commercial lawyers. Call LegalVision today on 1300 544 755.