Disclosing a Conflict of Interest as a Company Director

As a company director, you owe an array of duties to your company. This includes a duty of good faith and a duty of care. Also, in your capacity as a director, you must disclose to your company when you have a conflict of interest. This article will outline:

• what is a conflict of interest;
• when a director must disclose their conflict of interest; and
• what a company can do if a director has a conflict of interest. 

What Is a Conflict of Interest?

A conflict of interest occurs when a director’s interests and their company overlap. In such circumstances, a director may be interested in the transaction or deal.

You, as a director, will be interested in a transaction, or a proposed transaction, to which your company is a party to if you:

• are a party to the transaction;
• derive some material financial benefit from the transaction;
• have a material financial interest in another party to the transaction;
• are a director, officer or trustee of another party to (or person who may derive a material financial benefit from) the transaction. However, this is not applicable if the other party is the company’s holding company, a wholly-owned subsidiary of the company or a wholly-owned subsidiary of a holding company of which the company is also a wholly-owned subsidiary;
• are the parent, child, spouse, de facto partner or civil union partner of another party to the transaction; or
• are otherwise directly, or indirectly, materially interested in the transaction. 

When Should a Company Director Disclose a Conflict of Interest?

As a director, you may be in a transaction that your company is a party to. In that case, you must disclose this fact to the board of directors and the shareholders. Additionally, you must ensure that you or your board of directors enter this conflict of interest into the company’s interests register. You must disclose this immediately after becoming aware of your interest in the transaction. 

The entry should disclose:

• if you can quantity or represent this interest as a monetary value – the nature and monetary value of your interest; or
• if you cannot quantity or represent this interest as a monetary value – the nature and extent of that interest.

If you fail to disclose your conflict of interest, you will commit an offence. You may be liable to pay a fine of up to $10,000. Therefore, if you have a conflict of interest, you must disclose it immediately. However, even if you fail to disclose your interest, this lack of disclosure does not affect the transaction’s validity in question. 

What Can a Company Do if a Director Has a Conflict of Interest?

If you, or other directors, have a conflict of interest, there is an opportunity for your company to avoid this transaction. Your company may only avoid the transaction within the three months following the transaction’s disclosure to the shareholders (by way of the annual report or otherwise). 

If your company avoids a transaction due to a conflicted director, it must follow either the Companies Act or the company’s constitution. 

Further, if the company obtains prior consent from all company shareholders to a transaction in which a director is interested, the avoidance provisions will not apply. Obtaining shareholder consent is standard practice in situations where an interested director exists.  

When Is a Company Unable to Avoid a Transaction?

Your company cannot avoid a transaction if the company receives fair value under it. Whether a company is to receive fair value under a transaction will depend on the information known to the company and the interested director, at the time your company enters the transaction. 

For example, if you enter into a transaction during the ordinary course of your company’s business, and on typical terms and conditions, the company will likely receive fair value under it. 

Additionally, your company is not entitled to avoid a transaction which involves:

• the remuneration, or any other benefit, that is given to you, as a director, under the Companies Act; and
• an indemnity or insurance provided under the Companies Act.

In such circumstances, you are also not required to disclose your conflict of interest to your company. 

Key Takeaways

It is not uncommon for a conflict of interest to arise in the performance of your duties as a company director. However, it is crucial that you disclose these matters immediately and in the appropriate manner. Disclosure of any conflicts of interest ensures that you act in the company’s best interests. Failure to do so could result in a hefty fine. If you are interested in a transaction that your company is a party to, there is a possibility to avoid that transaction. However, your company may only avoid the transaction if they do not receive fair value under it.

If you are unsure whether you have a conflict of interest, contact LegalVision’s New Zealand corporate lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions