Directors and 'substantial' transactions

Out-Law Guide | 17 Jun 2010 | 12:26 pm | 1 min. read

This guide is based on UK law as at 1st February 2010, unless otherwise stated. Duties relating to conflicts of interest , an OUT-LAW guide, details the requirements for a director to declare an...

This guide is based on UK law as at 1st February 2010, unless otherwise stated.

Duties relating to conflicts of interest, an OUT-LAW guide, details the requirements for a director to declare an interest in a contract with their company. If the transaction is above a certain value, the Companies Act 2006 also requires that the contract is approved by shareholders.

A director cannot enter into a contract to acquire anything of substance from the company, or to sell anything of substance to the company, unless shareholders have first approved the deal by passing an ordinary resolution, or the contract is conditional on getting that approval.

For this requirement to bite, the asset being bought or sold must have a value of more than £100,000 or 10 per cent of the company’s net asset value as shown in its last accounts – where 10 per cent is equivalent to at least £5,000. (Note that although this requirement for shareholder approval is often referred to as applying to ‘substantial property transactions’ it does not relate exclusively to land and buildings. Any non-cash asset – for example, a trademark – can be included.)

This rule can be of particular relevance where a director is leaving a company, and part of the termination package includes the transfer of a company asset, perhaps a niche business in which the director has been working or a property they have been living in. But it does not apply to payments due under a director’s service contract or to payments for loss of office.

The need for approval extends to transactions between a subsidiary and a director of the holding company – in which case, the shareholders of the holding company have to back the deal as well. It also applies to transactions between a company and a person who is connected with a director of the company (or its holding company) such as a family member or another company in which the director has at least a 20 per cent interest.

If requirements for approval are not met, the company has the option of setting the contract aside. In any event, without shareholder approval, the director is liable to the company for any profit they make on the contract and must indemnify the company for any loss it suffers.