Directors interest declarations – What you need to know
20th August 2021
What does the law currently require?
Under chapter 2 of part 10 of the Companies Act 2006, company directors who are in any way directly or indirectly interested in a proposed transaction must declare the nature and extent of that interest to the other directors. This declaration must also:
- Be made before the company enters into the transaction or arrangement; and
- Be full and frank disclosure.
Fairford Water Ski Club Ltd v Cohoon (2021) (EWCA Civ 143)
Fairford Water Ski Club ltd (“the Company”) owned the freehold title to a lake and the surrounding land. The Company also ran a members’ club focused on water skiing on the lake and related activities on land. The defendant was the chairman and also a director of the Company whilst being the principal partner in an unincorporated partnership which ran a water ski school at the lake. Whilst the businesses were independent of one another, the judge remarked that they were “somewhat intertwined” as:
- The partnership ran the business of the Company in return for a management fee; and
- The partnership operated from a building at the lake called the “Old Rangoon Pub” paying rent to the Company for the use of the building and the lake.
The Company’s articles of association required that a director interested directly or indirectly in a proposed transaction shall declare the nature of that interest at the meeting but they permitted the directors who had made the declaration to vote and be part of the meeting.
After a question was raised at the AGM of the Company in 2006 regarding the relationship between the Company and the partnership, the board met with all four directors in attendance. After further discussion and deliberation it was decided to increase both the rent and the management fee payable to be in line with market rates in order to ensure that matters were dealt with at arms length. At the next meeting, due regard was taken of “the potential conflict of interest” that arose due to the position of the chairman and in 2007 a new management agreement was agreed between the two parties.
In 2017, the board of directors at the Company changed and the new board began proceedings against the defendant to recover the management fees because the director had failed to declare his interest in the proposed new management agreement at a board meeting as required by section 317 of the Companies Act 1985.
Although the High Court had ruled that the director had failed to comply with the requirements of section 317 (and the articles of association) in that the disclosure needed to be full as such that the other directors could see and understand the nature of the interest in question. The amount of any payment being made to a director should also be disclosed. The Court of Appeal allowed the appeal that the disclosure made had indeed been sufficient,
What does the interpretation mean?
In giving their decision, the judges at the court of appeal clarified the following:
- The nature of the declaration directors were required to make depended on the nature of their interest, where a directors interest was clear and obvious very little may need to be said. Where an interest was more indirect a fuller explanation would be required.
- It is required that the declaration of the nature of the directors interest be clear so that the board is fully informed of the real state of things
- Declarations under section 317 needed to be made at a board meeting, any declaration outside of board meetings did not count and that a declaration under that section must be made even where the interest was already known to the other directors.
- Disclosure was required of a contract or proposed contract with the Company therefore a disclosure might be made and generally should be made before the contract was concluded. The use of the wording “proposed contract” meant that the terms of the contract may not have been finally settled by the time of the board meeting at which the declaration was made.
- The law had allowed for a scenario where a consideration of entering into a contract occurs over many meetings and that the declaration need only be declared once preferably at the first meeting
- The purpose of the section was to ensure disclosure of the director’s interest in a proposed contract but not whether the contract would be in the Company’s best interest
What is the effect on today’s legislation?
It is suggested that the judgement of the court of appeal lends support to the proposition that if section 177(1) (where a director is engaged in a transaction and must declare it) of Companies Act 2006 is engaged (and that section 177 (6) does not apply (scenarios where a director need not declare an interest ) a declaration must be made without delay. Therefore expert legal advice should be sought as soon as possible too.
The level of detail and explanation required depends on the context but, where the nature and extent of the interest are clear and obvious, very little may need to be said to make the directors “fully informed of the real state of things”.
For further advice contact our experienced team of Solicitors