Conflict of interest of a director

A conflict of interest occurs, if a director has a conflict of interest in a managerial debate or decision-making. In such a situation, a director must refrain from any interference in the decision-making. This way you can avoid liability and the board decision will remain valid.

Directors should be guided by the interests of the company and its related enterprise. However, a director may also have a personal interest in decisions of the company. In this event, the director has to step back from the decision making process. So when is there a conflict of interest? And what should a director do in this situation?

Conflict of interest

A personal interest of a director may take 3 different forms:

1. Personal interest compatible: personal interest and company interest are compatible. This means, a personal interest in a certain decision does not necessarily need to cause problems.
2. Conflict of interest (belangenverstrengeling): A director has an interest which is not in line with the interest of the company. The term conflict of interest is a general overall term that also includes the statutory term “conflict of interest” (tegenstrijdig belang). A conflict of interest must be avoided where possible. Examples for conflict of interest include using corporate opportunities, while these are reserved for the company, or making a donation to family members.
3. Conflict of interest (tegenstrijdig belang): A conflict of interest in a managerial debate or decision-making. The conflict of interest is a specific, statutory form of conflict of interest. For instance, when the board decides to enter into a transaction with a company of which one of the director’s is a major shareholder.

What to do in a conflict of interest?

A director who has a conflict of interest must inform the other directors thereof and has to refrain from any interference in the decision-making process. It is also possible that the entire managing board has a conflict of interest so that the decision cannot be taken by the management board. In that case, the supervisory board (Raad van Commissarissen (RvC)) will take the decision. What if there is no supervisory board or the supervisory board also has a conflicting interest? In that case the general meeting of shareholders (Algemene Vergadering van Aandeelhouders (AVA)) will take the decision.

The articles of association usually have different regulations for decision-making in the event of a conflict of interest. For instance, it can be stipulated that a director with a conflict of interest may still be involved in the decision-making. This may also be regulated by management board by-laws.

Consequences of a decision with conflict of interest

What if the management has taken a decision despite a conflict of interest of one of the directors? This may have various consequences:

• Starting point is that the decision can be annulled on request of another director or other interested party in that decision. This means a decision is valid until the decision is annulled in court.
• The decision can also be declared void. This means the decision is deemed never to have been taken. Such a declaration of voidness is only under discussion if the decision was taken by the wrong body, for instance by the supervisory board instead of the general meeting of shareholders that should have taken the decision. Or if the decision was taken by a replacement body when the decision should have been taken by the management board despite a conflict of interest. A decision with external effect can also be declared void, such as a decision to issue shares. For those that have bought the shares, the declaration of voidness could have unwanted consequences. If the third party can show that it did not know or should have known of the conflict of interest, the decision can be maintained.

In addition, ignoring a conflict of interest can lead to directors’ liability. Important is:

• whether the director has informed the associate directors
• whether he has involved the conflict of interest in the decision-making, and
• whether a different decision would have been taken, if the director had been so decent as to refrain from the decision-making.

Our advice

Consult the articles of association if you have any doubt about a conflict of interest. You are well-advised to report a conflict of interest, if necessary, to the other directors and to refrain from the decision-making. This way, you can avoid impairment of the validity of the decision and potential directors’ liability.

More information

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