Disclosure of a conflict of interest

If a director of a company has a proprietary interest that conflicts with that of the company, he must disclose this in a timely and correct manner. How do you do that?

The conflict of interest

The term “conflict of interest” in company law refers to the situation where a member of the board of directors of a company has a “direct or indirect interest of a patrimonial nature that is contrary to the interests of the company.” The Companies and Associations Code (CAC) provides for explicit rules about what must be done in such case.

If one or more directors have a conflict of interest, the company's decision must be taken by the other non-conflicted directors. If the board of directors is a collegial body, the conflicted director may not participate in the deliberations or in the decision-making. The director concerned must inform the board of directors himself, before the board takes a decision. His statement, together with an explanation of the nature of the conflict of interest, must be included in the minutes of the meeting of the governing body.

If all directors are in conflict, the decision must be taken by the general meeting.

If there is only one director, he must also have the decision taken by the general meeting.

In situations where the director and the shareholder are one and the same person, that person may make the decision himself.

There are some exceptions to these rules, such as for transactions between affiliated companies or for usual transactions at market conditions.

The report

If a conflict of interest arises, the party authorized to take the decision – i.e. the non-conflicted directors, the general meeting or the director himself – must prepare a report on the nature of the decision or transaction. This is done via the minutes of the meeting or via a special report.

The report must also contain the financial consequences of the transaction or decision and a justification of the decision taken.

In the case of a situation in which the sole director is also the sole shareholder, the report must also contain the agreement concluded between the director and the company.

The annual report

In principle, the relevant part of the minutes or the special report must be included in its entirety in the annual report, but it is sufficient to mention the conflict of interest in the annual report and to refer to the minutes or the special report, which are then attached in full.

Small companies that are not obliged to include an annual report in their annual accounts must prepare a separate document that is then filed with the annual accounts. That document also contains the full text of the minutes or the special report.

If the company has appointed a statutory auditor, the minutes must be communicated to the statutory auditor and the statutory auditor must express an opinion in a separate section on the financial consequences for the company of the decision of the board of directors or of the general meeting.

The annual report is the document in which the governing body accounts for its policy. It includes things like:

a true and fair view of the development and results of the company and of the position of the company;

a description of the main risks and uncertainties the company is facing;

information about the circumstances that could significantly influence the development of the company, insofar as such information is not of such a nature that it could cause a serious disadvantage to the company;

information on research and development activities;

etc.

The annual report must also contain information on “the significant events that took place after the end of the financial year”. If there is a conflict of interest between the closing date of the financial year and the date on which the general meeting takes place, you must report that conflict of interest in the next annual financial statements. You should therefore not wait for the annual accounts and annual report to be drawn up for the financial year in which the conflict of interest arose.

Sanctions

Failure to report a conflict of interest is subject to the usual corporate law sanctions, which aim to protect the interests of the company, creditors and shareholders. This means that any concerned party can claim the nullity of decisions or transactions taken in violation of the above rules. In addition, the directors can be held jointly and severally liable.