Directors’ Conflicts of Interest: A Contribution to European Convergence
Published in Hanne Birkmose, Mette Neville & Karsten Engsig Sørensen (eds.), Boards of directors in European companies – reshaping and harmonising their organisation and duties, Kluwer Law International 2013
19 Pages Posted: 9 Dec 2014
Date Written: October 2013
It is widely acknowledged in the USA and Europe that a core obligation of directors to their companies is a duty of loyalty. It is of fundamental importance for a company to be able to rely on the undivided loyalty of its directors.
Broadly speaking, the duty of loyalty is the principle that the company’s interests take priority over the private interests of the director. A number of kinds of the application of the principle are dealt with in this article.
The duty of loyalty applies in different ways, the first being as a preventive measure. The duty may be seen as a basis for avoiding conflicts of interest. For example, according to UK law a director has a duty to avoid conflicts of interest (also called ‘no-conflict’), which comprises any conflict or possible conflict that may arise, for example in connection with multiple directorships or where a director carries on or is associated with a business that competes with the company. If a director finds himself or herself in a situation of possible conflict, they should be obliged to terminate the situation.
A second way to apply the duty of loyalty is to qualify it as a substantive rule, exemplifying the typical situations in which conflicts of interest occur. According to this, a director should be prohibited from making secret profits, e.g., by exploiting property, information or corporate opportunities, where there is an actual conflict of interest - a no-profit rule.
Although they are related, the duties of no-conflict and no-profit are independent of each other. This means that either or both may apply in a given situation.
The following review of European Union and national rules on conflicts of interest shows that there are substantial differences between Member States’ companies legislation on conflicts of interest. This article argues that there is a need for European Union convergence in this area.
The article contains suggestions for developing models for an EU approach to rules on conflicts of interest which may be acceptable and useful for EU convergence in this area. Section 2 deals with the EU company law that regulates conflicts of interest, and section 3 deals with national laws, including a comparative review of the national legislation of the Member States. In section 4, we consider the core elements which may foster EU convergence.
Keywords: conflicts of interest
JEL Classification: K22
Suggested Citation: Suggested Citation