Non-declaration of director’s interest in contracts is a common issue encountered when reviewing directors’ resolutions in the course of legal due diligence for M&A or IPO exercise.

𝗖𝗼𝗺𝗺𝗼𝗻 𝘀𝗰𝗲𝗻𝗮𝗿𝗶𝗼

X is a director and shareholder of Company A as well as Company B.

Company A and Company B enter into a contract.

𝗗𝗶𝘀𝗰𝗹𝗼𝘀𝘂𝗿𝗲 𝗼𝗳 𝗱𝗶𝗿𝗲𝗰𝘁𝗼𝗿’𝘀 𝗶𝗻𝘁𝗲𝗿𝗲𝘀𝘁

Section 221(1) of the Companies Act 2016 (“𝗖𝗔”) requires every director of a company who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the company to, as soon as practicable after the relevant facts have come to the director’s knowledge, declare the nature of his interest at a meeting of the board of directors.

In the scenario above, X must declare his/her interest in the agreement to the board of directors of Company A and Company B pursuant to section 221(1) of the CA. Contravention of this section is an offence under the CA. In practice, the declaration is typically set out in the respective directors’ circular resolutions of Company A and Company B passed to approve the execution of the agreement.

There are exceptions provided under subsections 221(2) and 221(3) to the requirement for declaration of director’s interest in contracts.

𝗩𝗼𝘁𝗶𝗻𝗴 𝗯𝘆 𝗶𝗻𝘁𝗲𝗿𝗲𝘀𝘁𝗲𝗱 𝗱𝗶𝗿𝗲𝗰𝘁𝗼𝗿

A director must not vote on a contract he/she is interested in unless any of the exceptions in section 222(2) of the CA applies.

The prohibition does not apply to a private company which is not a subsidiary to a public company.

Therefore, in the scenario above, if both Company A and Company B are private companies which are not subsidiaries to any public companies, X may vote on the directors’ resolutions of Company A and Company B in respect of the contract.

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This post was first posted on Linkedin on 6 May 2022.