June, 2024

What is Conflict of Interest and Duty:

A director stands in a fiduciary relationship with the company s/he is appointed to. Thus, a director is mandated by the duties arising from this relationship to act at all times in the best interest of the company in all dealings with the company or when acting on behalf of the Company. Awareness of potential conflict of interest and duty situations is particularly an important factor every company director must consider when acting in that capacity.

Conflict of interest and duty occurs when a person who has a fiduciary relationship with another person (principal) has a personal interest in a transaction which he enters on behalf of his principal or owes a duty to a third party such that he finds himself in a situation where performing his duties to his principal in a manner which promotes the best interest of his principal will necessarily injure his personal interest or will be inimical to performance of the duty that he owes to the third party. In this situation, the person may seek to advance his personal interest or the interest of the third party to the detriment of his principal.

For a company director, this can mean the director having a personal interest in the subject matter of a transaction that the company proposes to enter into or working for another company whose interest is incompatible with the interest of the company in respect of a particular transaction or contract.

Types of Conflict of Interest and Duty:

There are two types of conflict of interest and duty, namely:

• Situational (meaning the conflict arises from the circumstances of the directorship, such as being a director of two companies concurrently).
• Transactional (meaning the conflict relates to a specific transaction, such as one in which the director might personally benefit).[1]
  
  

The Legal Dimension:

To appreciate the context within which the law on conflict of interest of a director operates, it is important to understand the duties imposed on a company director by the primary legislation which governs companies, that is, the Companies Act, 2019 (Act 992).

By the provisions of Section 190 of Act 992, a director of a company stands in a fiduciary relationship towards the company and is required to observe the utmost good faith towards the company in a transaction he enters into with or on behalf of the company. A director shall also act in a manner he/she believes is in the best interest of the company as a whole, to preserve the assets, further the business, and promote the purposes for which the company was formed, in the manner that a faithful, diligent, careful and ordinarily skilful director would act in the circumstances and in doing so, he/she shall have regard to (a) the likely consequence of any decision in the long term, (b) the impact of the operations of the company on the community and the environment, and (c) the desirability of the company maintaining a reputation for high standards of business conduct.

In respect of the duty of a director to observe utmost good faith in transactions involving the company and act in the best interest of the company, section 192 of Act 992 prohibits a director from putting himself in a conflict of interest or duty situation without the consent of the company. Thus, Section 192(1) of Act 992 provides that:

“(1) Despite a provision in the constitution of a company to the contrary, a director shall not, without the consent of the company in accordance with section 193, place that director in a position in which the duties of the director to the company conflicts or may conflict with the personal interests or the duties to other persons…”,

The section then provides examples of conflict of interest and duty situations which the director must avoid as follows:

(a) use to the advantage of that director any money or property of the company or use, otherwise than pursuant to section 198, any confidential information or special knowledge obtained by that director in the capacity of director;

(b) be interested directly or indirectly, otherwise than merely as a shareholder or debenture holder in a public company, in a business which competes with that of the company; or

(c) be personally interested, directly or indirectly, in a contract or any other transaction entered into by the company except as provided by Section 194.”

The Act further prohibits a director from entering into a contract on behalf of a company in which he is aware that another director of the company or an associated company has a material interest unless the contract has been approved by a resolution after the requirements on disclosure of the director’s interest have been complied with. Material interest in this context excludes situations where the director is a debenture holder in the other company or has not more than 2% of the shares of a public company. This implies that, in the case of a private company, holding any number of shares in the company amounts to material interest.

Case law in Ghana on conflict of interest and duty of a director abounds. In the case of J. A. Angme V. Upper Quarry Ltd, At-Ernest Dawlah & The Attorney General (2019) JELR 67846 (CA), Torkornoo JA (as she then was) admirably explained the form and manner in which conflict of interest of a director may occur when she observed as follows:

“But I think that the third and most frightening part of conflict of interest was that the purchaser of URDECO’s shares, the Appellant was buying the very asset he represented on 1^st Respondent’s board. So, while he ought to have had an interest in the seller (URDECO) getting value for money in the shares, he had a presumed interest in the buyer getting the best possible deal on the shares on the opposite end of value for money. Then he sat as representative of seller, was himself the buyer, and failed to tell the Company in which the shares were in that he was holding both ends of the transaction in the shares in their Company. In Commodore v. Fruit Supply (Ghana) Ltd 1977 1 GLR 241 the Court of Appeal held that ‘the general equitable principle was that, a director of a Company, by reason of his fiduciary position, was precluded from entering into a binding transaction on behalf of the Company in which he himself had a personal interest which conflicted or might conflict with the interests of the Company because he had a fiduciary duty to protect the interests of the Company. Such a director was not entitled to keep the benefit or profits of such transaction unless otherwise provided for in the regulations of the Company.’”

Furthermore, Justice Dr. Richmond Osei-Hwere in Stephen Addae & James Oteng Poku V. Atwima Mponua Rural Bank Ltd & The Chairman, Board Of Directors (2017) JELR 66192 (HC) elucidated on this important duty of a director as follows:

“The term fiduciary duty is derived from the Latin phrase fide et fiducia, which means “by faith and confidence.” In Bristol and West Building Society v. Mothew [1998] CH 1, 18, Millet L.J defined fiduciary duty as follows:

“A fiduciary is someone who acts for and on behalf of another in a way that gives rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary … he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary.”

Disclosure as an Exception to the Rule:

A proviso to the prohibition on a director from engaging in conflict of interest and duty is the consent of the company. Such consent is to be provided by the Board of Directors of the company after the affected director has disclosed all material facts relating to the transaction to the board. The consent can be given either before or after the transaction has been consummated. Notably, the consent of the company for the director to proceed to engage in a transaction in which he is conflicted can only be given if the constitution of the company does not prohibit giving of consent in the case of a private company or authorises it in the case of a public company.

Procedure for Disclosure:

It is important to also note that, the decision to authorise the director’s involvement in the transaction shall be taken without the participation of the affected director. This means that he shall not be counted for purposes of establishing the quorum of the meeting of directors to decide on the matter and shall also not vote on the matter. Section 194 of Act 992 permits a director to enter into a contract with the company provided he makes full disclosure of his interest in the contract at the meeting of the board of the company at which the decision to enter into the contract comes up for the first time for consideration if his interest arose before the said first meeting or the next meeting of the board if his interest arose after the first meeting.

However, if the director becomes personally interested in the contract after it is made, he is required to disclose his interest at the first meeting of the board after he became so interested. The particulars required to be disclosed are the nature and extent of the interest of the director and these include notice of the fact that the director is a member of a company with which the company of which he is a director seeks to enter into a contract.

To record the disclosure of director interests, an Interests Register is required to be maintained by every company.

Sanctions For Breach:

The Act imposes both criminal and civil sanctions on a director who breaches his duty to avoid conflict of interest and duty including failure to disclose his interest in a transaction involving the company. Of criminal liability of an errant director, the Act provides that breach of the duty amounts to a misdemeanour offence for which the director is liable on summary conviction to a fine of not less than two hundred and fifty penalty units and not more than five hundred penalty units. In real terms, the fine ranges from GHS3,000.00 to GHS6,000.00.

The civil sanctions visited on an errant director are in the nature of liability of the director to compensate the company for the loss the company suffers as a result of the breach. Furthermore, the director shall account to the company for any profit gained by him on account of the breach. Moreover, the subject matter contract of the breach may be rescinded by the company.

Conclusion:

The duty of a director to avoid engaging in conflict of interest and duty stems primarily from a director’s fiduciary relationship with the company. This relationship requires the director to promote the best interest of the company, act in utmost good faith in steering the affairs of the company and avoid making private gain in the performance of his duties as a director. This duty of a director is cardinal to ensure that ultimately, a director acts in ways that drive profitability, growth and sustainability of the company.

[1](2019) JELR 67846 (CA)

[1] 1977 1 GLR 241

[1] (2017) JELR 66192 (HC)

[1] [1998] CH 1, 18