III. CONFLICTS OF INTEREST
This is a bad news/good news area. The bad news is that this is
an easy way for a director to get into trouble. The good news is that
a director is not necessarily forbidden from having certain conflicts,
so long as they are dealt with correctly.
There are two major areas where conflict may arise for a director.
1. Where the directors do something to benefit themselves rather
than the company; something that is not "in the best interests
of the company" such as:
- they issue shares or do things to defeat a takeover bid so they
can keep their jobs;
- they take a business opportunity that should have gone to the company
and use it for themselves;
2. The second is where a director personally contracts with the company
or competes with the company or is a director of two companies that
do business with each other.
The first area is forbidden - basically, you cannot take things
for yourself that belong to the company.
However, a director is permitted to be interested in transactions
with the company. This area is protected by s. 145 of the Company
Act - if certain steps are followed.
Under s. 145 of the B.C. Company Act, if a director is interested
in a transaction with the company, the director must account for any
profits that he or she makes that arise from the transaction unless
the director:
- discloses the interest;
- the other directors approve the transaction; and
- the interested director refrains from voting.
The section merely says that the director must not vote. It does
not say that he or she is supposed to abstain from any discussion
on the motion. The interested director may be counted in the quorum
for the meeting if that is allowed by the company's Articles.
If the director cannot meet the foregoing test (perhaps because
all of the directors are interested in the transaction or if there
is only one director) then he or she may still participate in this
conflict transaction provided that:
- the contract is reasonable and fair to the company;
- the interest is properly disclosed to the shareholders; and
- the shareholders approve it with a special resolution.
You will note that this last requirement of being reasonable and
fair to the company is not required if the transaction may be approved
by the directors; it is required only if it has to be put to a vote
of the shareholders.
You should also keep in mind that you should always go through the
formal process of disclosure and ratification (that is, comply technically
with these statutory rules) and make a record of it even if it may
seem a little silly at the time. If the company has only two or three
directors who are the only shareholders and all are aware of the circumstances,
who is to complain you might ask?
For one thing, the B.C. Company Act allows any interested person,
as well as the company, to complain if the proper steps of disclosure
and ratification are not observed and this may well include a creditor.
For another thing, the shareholders may change or a Trustee in bankruptcy
may later be appointed and the new group of shareholders or the Trustee,
upon discovering the profit made by the former directors, may claim
for the repayment of any profit.
If possible, it is useful in any conflict situation to obtain the
unanimous ratification of the action by the shareholders.
Things such as secret benefits, secret commissions and bribes are
forbidden and will render the director or officer who took them liable
to account, even if it was not gained at the expense of the company
and even if the opportunity was not open to the company. A director
who takes a bribe in any form, even if it appears to be a gift, is
liable to account for it. A director must not accept personally, any
gift or remuneration from someone dealing with the company
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