Conflicts of interest under the new CAC – new rules, new questions and points of attention

The regulation set out in the Companies Code (CC) to manage conflicts of interest in cases of directors having conflicting proprietary interests is complicated, since it depends on the situation. Just think about the appointment of an ad hoc trustee in private limited companies (‘BVBA’ / ‘SPRL’) having no collegial board; the duty to abstain imposed on directors of listed public limited companies (‘genoteerde NV’ / ‘SA noteé’) which does not apply on directors of unlisted companies; the lack of statutory regulation for directors of non-profit organizations (‘VZW’ / ‘ASBL’) – the list goes on. The legislator has taken the opportunity offered by the new Companies and Associations Code (CAC) to harmonize the regulation managing conflicts of interest. Here we provide an overview of the most significant changes:

Duty to abstain becomes the general rule. The director having a conflict of interest must abstain at all times, which implies that s/he will no longer be allowed to participate in the deliberations or the vote.

Harmonization of the rule establishing who is allowed to make decisions in cases of a conflict of interest. There will be one rule that applies equally to public limited companies (‘NV’ / ‘SA’), private companies (‘BV’ / ‘SP’) and cooperative companies (‘CV’ / ‘SC’), setting out that in the case of a conflict of interest only the non-conflicted directors will be allowed to make the decision. This means that the mandatory appointment of an ad hoc trustee in private companies (‘BV’ / ‘SP’) will no longer be required. In the event that all the directors have a conflict of interest, it will be up to the general meeting of shareholders to make the decision. The exception made for a sole director being also the sole shareholder remains unchanged. In the case of non-profit organizations (‘VZW’ / ‘ASBL’), the CAC foresees however that the general meeting must make the decision if the majority of the directors has a conflict of interest. If one of the directors of a foundation has a conflict of interest, the decision will also be made by the non-conflicted directors, with two exceptions, namely if the director in question is the sole director, or if all the directors have a conflict of interest in the absence of a body composed of members/shareholders.

The CAC provides an overall scope of application. Whereas the Companies Code does not provide regulations for managing the conflicts of interest of non-profit organizations (‘VZW’ / ‘ASBL’) and foundations, the CAC foresees that the procedure resolving conflicts of interest will also apply for the latter. Each conflict of interest within a non-profit organization (‘VZW’ / ‘ASBL’) or foundation must be reported and the conflicted director will have to comply with his duty to abstain. However, the legal obligation imposed on the governing body to describe the decision that has raised the conflict of interest and to include the justification of the final decision in the annual report or the document to be filed with the annual accounts will only apply to ‘large-sized’ non-profit organizations (‘VZW’ / ‘ASBL’) and foundations. The legislator exempts ‘small-sized’ non-profit organizations (please refer to criteria art. 3:47, §2 CAC) from this disclosure obligation. The regulation managing conflicts of interest now also applies to cooperative companies (‘coöperatieve vennootschap’ / ‘société coopérative’). Finally, this procedure must also apply in cases where a permanent representative of a director-legal person has a conflicting proprietary interest with the managed company. The managing director falls outside the scope of the regulation, which is understandable as the procedure does not apply to customary transactions carried out under customary market conditions.

One final change concerns the nullity of the decisions that have been made contrary to the regulation managing conflicts of interest. Under the Companies Code, only the company itself may request the nullity of such a decision. Filing nullity actions on behalf of the company falls within the competence of the governing body, which implies that this kind of claim was not often used in practice. Under the CAC, every interested party shall be entitled to file a nullity action.

New rules give rise to new questions/points of attention. The CAC foresees an extended possibility, allowing the governing body to make decisions by unanimous written consent unless the articles of association provide otherwise. The question therefore arises as to whether the decision-making procedure by written consent can also be applied in the event that one of the directors has a conflict of interest. In our opinion, it can be argued that in the event of a decision-making procedure by written consent, no deliberations are held and that, as such, the conflicted director does not participate in the deliberations. As the director is also not allowed to take part in the vote during an ordinary board meeting, it can be argued that in this particularly case, the requirement of unanimity should be interpreted as the requirement of unanimity of the non-conflicted directors. All the other requirements of the procedure, such as the reporting of the conflict of interest in the minutes, must be correctly applied.

The duty to abstain imposed on the conflicted director may also give rise to practical application problems in case of veto rights. If the board of directors has to make important decisions, it can quite often occur that a minority shareholder wants to safeguard his interests by granting veto rights to his representative in the board. In this case, no decisions can be made without the approval of the director concerned. We recommend planning alternative arrangements in case the director in question has a conflict of interest and may not take part in the decision-making/vote, and therefore is unable to exercise his veto right. This can be achieved by providing, for instance, that the decision must be approved by the general meeting of shareholders in which the shareholder on whose proposal the director concerned has been appointed may exercise a veto right.

The same solution, i.e. referral to the GM, can be used when the conflict of interest prevents a company from reaching the attendance quorum that is required by the articles of association for holding the board of directors.

If the company or association has a collegial body of directors, and if there is only one non-conflicted director left due to the conflict of interest, we believe that the latter is able to make a legally valid decision. Indeed, the law explicitly stipulates that the decision can be made by non-conflicted directors.

These practical problems could already occur in listed companies, but they were largely theoretical as these companies usually have a large number of directors. As the new CAC extends the duty to abstain to smaller sized companies, these issues are likely to become more frequent in the future.

Anneleen Steeno, intui attorneys