In an interconnected business environment, it is natural for a board member, manager or partner to have an interest in another company that deals with yours, as a supplier, tenant or service provider. The problem is not the existence of this relationship, but managing it without disclosure or controls, which may harm the company and expose decision-makers to liability.
What Is a Conflict of Interest?
A conflict of interest arises when a decision-maker in the company has a personal interest, direct or indirect, that may affect the objectivity of their decision. Examples include:
- The company contracting with an establishment owned by a board member or one of their relatives.
- A board member engaging in a business that competes with the company.
- Accepting gifts or benefits from suppliers or customers.
- Exploiting the company's information or opportunities for personal benefit.
What Does the Law Require?
The Companies Law sets rules for the company's dealings with its board members or managers when they have an interest in the business and contracts carried out for its account. In essence, these rules rest on disclosure of the interest, the interested person's abstention from voting on the decision, and obtaining approval from the competent body as determined by the Law and the company's bylaws. The Corporate Governance Regulations issued by the Capital Market Authority add detailed requirements for listed companies.
Elements of a Conflict of Interest Policy
- A clear definition of conflicts of interest and related parties suited to the nature of the company.
- An annual disclosure submitted by board members and senior executives of their interests and relationships.
- Immediate disclosure whenever a new conflict arises, before the matter is discussed.
- Approval procedures specifying who approves the transaction and how this is documented.
- Arm's-length terms: ensuring the transaction is on fair terms no less favourable than those offered to third parties.
- A register of related-party transactions that is reviewed periodically.
Common Mistakes
- Relying on a verbal disclosure in the meeting without recording it in the minutes.
- Allowing the interested member to take part in the discussion and the vote.
- Splitting a transaction into small contracts to avoid approval procedures.
- Failing to update disclosures when members' ownership or positions change.
Early, documented disclosure is the best protection for the interested person themselves, before it is protection for the company.
Managing conflicts of interest transparently strengthens the trust of partners, investors and financiers. Our firm helps companies draft conflict of interest policies and related-party transaction procedures in line with the Companies Law and the applicable regulations.