Conflicts of Interest - New duty and guidance from 1 October 2008

With effect from 1 October 2008, the Companies Act 2006 (the "Act") requires each company director to avoid situations in which he has interests or duties that (actually or potentially) conflict with the interests of the company concerned or the duties he owes to it.  This is likely to cover situations in which a director is also a trustee of the company's occupational pension scheme (or is a director of a trustee company in relation to the scheme). 

Separately, the Pensions Regulator (tPR) has issued guidance - also on 1 October 2008 - as to how pension scheme trustees should address conflicts of interest.

Protection under the Act

The duty on directors to avoid conflicts will not be breached to the extent that any actual or potential conflict has been authorised by:

the other directors of the company, at the time when it arises.  The conflicted director must not participate in the authorisation, ie, by way of quorum or vote.  For private companies that were incorporated prior to 1 October 2008, the shareholders must have first resolved that the directors may grant such authorisations.  For public companies, the articles of association must provide for such authorisations to be given; or

the articles of association; or

the company shareholders (on a case by case basis).

For technical reasons, we would usually recommend a combination of the first two options.

Regulator guidance

tPR's guidance on conflicts of interest acknowledges the new statutory duty on directors, but relates to the range of circumstances in which conflicts might arise for a trustee, including those where the trustee is also a director of the sponsoring employer or a beneficiary under the scheme, and those that might arise out of the choice of scheme advisers.  The guidance gives ideas for how trustees might best understand, identify, evaluate, and manage or avoid conflicts of interest.  Accordingly, the guidance does not impose new law, rather it sets out tPR's views on how existing requirements might best be addressed. 

It is important that persons who are both directors of the sponsoring employer and trustees or directors of a trustee company recognise that any conflict of interest needs to be addressed in both capacities, which can be a difficult juggling act.

Further information can be found on The Pensions Regulator's website:

The Pensions Regulator:  Regulatory guidance on Conflicts of Interest

Action

Companies may wish to review or put in place mechanisms for managing director conflicts of interest (see above) and for dealing with related issues, such as the release of confidential information (which might include entering into confidentiality agreements with the trustees and/or arrangements for what should happen if a director/trustee has information that is relevant to both parties but confidential to one of them, which the party concerned does not want to release). 

Trustees may also wish to review or put in place mechanisms for addressing conflicts of interest, including maintaining a register of conflicting interests, having protective provisions in the scheme rules, and adopting and implementing a conflicts policy.  Trustee companies will not only have to consider the steps they should take in their capacity as trustee of a scheme, but also whether any are required for their directors to satisfy the duty on them under the Act.

For more information or advice please contact:

Carolyn Saunders

Telephone +44 (0)20 7300 4752 or c.saunders@taylorwessing.com

Mark Smith

Telephone +44 (0)20 7300 4090 or m.smith@taylorwessing.com

Ewan Horn

Telephone +44 (0)20 7300 4860 or e.horn@taylorwessing.com