Irish company law requires all directors of Irish companies to disclose the nature of his or her interest, whether direct or indirect, in a contract or a proposed contract to a meeting of the company’s board of directors. The requirement applies to any contract to be entered into by a company which could reasonably give rise to a conflict of interest.
The recent English Court of Appeal decision in Fairford Water Ski Club v Cohoon & Anor (“Fairford”) provides key insights on the factors to be taken into account by directors when determining whether such a declaration should be made, as well as practical steps to discharge the obligation. Fairford is likely to provide persuasive guidance for the Irish courts in respect of any analysis of the relevant provisions as it considered the applicable UK equivalent provision (at the time of the facts of the case).
The facts in Fairford
Fairford centres on a dispute concerning a management services agreement (the “MSA”) entered into between Fairford Water Ski Club (the “Club”) and Craig Cohoon Watersports (“Watersports”) in May 2007.
The Club owned a lake with surrounding land, which it used to run a members’ club for water skiing and related activities. Watersports operated a water ski school and shop at the lake. Mr Craig Cohoon was both a partner in Watersports and a director of the Club. The Club changed management in 2017 and commenced an action for damages against Mr Cohoon, alleging that he breached his duties as director.
The claim at the centre of Fairford related to the repayment of fees totalling £350,000 paid by the Club to Watersports under the MSA for managing the land between 2007 and 2017. The Club alleged that there was no agreement between the Club and Watersports for the payments to be made and that they constituted unauthorised payments made by Mr Cohoon. The lower court held that, although there was in fact an agreement, the Club was entitled to recover the management fees as Mr Cohoon failed to adequately declare the nature of his interest in the MSA to the board of the Club.
The Court of Appeal subsequently overturned the lower court’s decision and held that the declaration made by Mr Cohoon was sufficient to comply with the company law requirements.
Six factors of relevance when determining whether there has been a failure to declare
In overruling the lower court’s decision, the language and purpose of the disclosure requirements were examined and the court considered six factors to be relevant when determining whether there has been a failure to declare an interest in a contract:
The nature of the required declaration will depend on the nature of the director’s interest. The broad declaration requirement applies to any kind of interest, direct or indirect, which a director may have in a contract or proposed contract with the relevant company. Therefore, the extent of the disclosure will depend on the complexity of the contract. Citing previous case law, Males LJ explained that the declaration must make the board “fully informed of the real state of things.”
The declaration must be made at a board meeting and declarations outside of board meetings do not discharge a director’s disclosure obligations. Crucially, Males LJ noted that this requirement applies even if the other directors are already aware of the conflict of interest.
- Proposed contracts
The declaration may be made before the contract is finalised. Males LJ noted that the legislative reference to “contracts” and “proposed contracts” indicates that the terms of the contract may not have been fully agreed at the time of the board meeting at which the declaration is made.
The declaration must be made at the first board meeting at which a proposed contract is considered. Males LJ noted that a board of directors may consider the entry into a contract over a series of board meetings and any declaration need not be repeated at every meeting.
The notice of an interest may be given under “very general terms”. Fairford confirms that a declaration will be sufficient if a director gives notice that he is a member of a specified company or firm and is to be regarded as interested in any future contract which may be made with that company.
- Best interests? Not relevant
The purpose of a declaration is to ensure the disclosure of a director’s interest in a contract or proposed contract; whether such contracts are in the best interests of the company is not relevant. Furthermore, if there is no conflict of interest, then no declaration is required.
Taking the above factors into consideration, the court found that Mr Cohoon had properly disclosed his conflict of interest when the MSA was considered by the board of directors of the Club. In particular, Males LJ noted that Mr Cohoon’s interest in the MSA was expressly raised at the Club’s annual general meeting and discussed by the directors at several board meetings. The board of directors even convened one board meeting for the sole purpose of discussing the relationship between Mr Cohoon and Watersports. Significantly, Mr Cohoon’s interest was directly referenced in the minutes of such board meetings. The fact that the MSA was not finalised when Mr Cohoon declared his interest did not change the fact that the interest had been declared. The nature and the extent of Mr Cohoon’s interest in the MSA was already known and obvious to the board of the Club by the time that the finalised MSA was approved, meaning that the disclosure did not need to be repeated.
Key takeaways for directors of Irish companies
Fairford shows that directors should take a prudent, common sense approach when determining whether to make a declaration to their fellow directors in respect of their interests in a contract or proposed contract. Given the similarities between the Irish and English company law, the six factors listed by Males LJ should serve as useful guidance to Irish directors when deciding whether it is appropriate to declare an interest in a contract with the company. In particular, the nature, timing and location of any declaration made by a director is crucial, given that a failure to make the disclosure may lead to civil consequences and, furthermore, it may render the relevant contract voidable. The amount of the claim in a case such as Fairford is a reminder of the potential risks associated with what might be considered a ‘mere’ technical breach of certain company law provisions. Fairford also emphasises the importance for companies to clearly record conflicts of interest within company minute books in order to reduce the risk of any questions being raised down the line; including for example, during audits.