Disclosure of Interest and Related Party Transactions

In one line

A director must declare where his interests lie, must declare again when a particular contract comes up, must leave the room, and if the company deals with a related party it needs approval or the contract can be undone.

In exam wording: section 184(1) requires every director to disclose his general concern or interest at the first Board meeting he attends and at the first meeting of every financial year; section 184(2) requires him to disclose his interest in a particular contract at the meeting where it is discussed and not to participate; section 188 requires Board consent by resolution, and for prescribed companies or transactions prior approval of the members, for related party transactions; and section 189 requires a register of them.

Why the law has this at all

A director on both sides of a bargain cannot be trusted to strike it fairly, and the law has three possible responses.

Forbid it outright. That is section 185's approach for loans to directors, and it works there because a loan to a director serves no purpose the company needs.

Do nothing and rely on the general duty. That is what section 166(4) says as a principle, but a principle with no procedure is unenforceable, because nobody knows who is interested in what.

Or make it visible and take the interested man out of the decision. That is the approach of sections 184 and 188, and it is the right one for ordinary commercial dealings, because a company often has good reasons to buy from a director's firm. What it must not do is decide with him in the room.

So the scheme is: declare, withdraw, get approval, record. Section 184 does the first two, section 188 the third, section 189 the fourth.

Some words this chapter uses

Concern or interest covers both a financial stake and any other interest. A related party is defined in section 2(76). Arm's length is defined in Explanation (b) to section 188(1). Office or place of profit is defined in Explanation (a). Voidable at the option of the company means the company may set it aside but need not. To ratify is to approve after the event.

The general declaration: section 184(1)

Every director shall disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals, which shall include the shareholding, in the prescribed manner:

• at the first meeting of the Board in which he participates as a director;
• thereafter at the first meeting of the Board in every financial year; and
• whenever there is any change in the disclosures already made, at the first Board meeting held after such change.