Non-Disclosure of Conflict of Interest by Directors: How This Affects You

Have you ever wondered how undisclosed interests by Directors can affect your company? Even with the best intentions, directors who participate in decisions where they have personal stakes can unintentionally expose themselves and the company to legal and operational challenges. 

Non-disclosure of conflict of interest can have serious legal, financial, and reputational consequences for a company and its shareholders. Where directors or key officers fail to disclose personal interests in transactions, it undermines corporate governance, exposes the company to regulatory sanctions and potential litigation, and may result in the invalidation of affected transactions. For shareholders, such non-disclosure erodes trust, distorts decision-making, and can lead to financial loss through mismanaged or self-serving deals that do not reflect the company’s best interests. Ultimately, transparency in disclosing conflicts is not merely a compliance obligation but a critical safeguard for preserving corporate integrity and protecting shareholder value.

Understanding how to manage conflicts of interest is therefore essential for strong corporate governance.

Directors as Fiduciaries Vis-à-Vis the Demands of CAMA 2020

A director of a company stands in a fiduciary relationship towards the company and, as such, has a duty to observe the utmost good faith towards the company in any transaction with the company or on the company’s behalf.  The duty of care requires directors to act with the same care that a reasonably prudent person would take in a similar position. This duty of care places a legal demand on Directors, chief amongst which is the duty to disclose conflicting interests. 

The Companies and Allied Matters Act (CAMA) 2020, which is the primary legislation governing companies in Nigeria, makes it clear that directors must act in the best interest of the company. When directors have overlapping interests in transactions, they are required to disclose these interests to the Board. Where appropriate, they must recuse themselves from participating in decision-making. Proper disclosure ensures that decisions are valid, protects directors from personal liability, and strengthens shareholder and investor confidence. The recent reforms introduced by CAMA 2020 are clearly targeted at improving corporate governance, strengthening accountability, and ensuring Board effectiveness. For directors, CAMA 2020 demands that:

1. Directors must act honestly, in good faith, and in the best interest of the company at all times.
2. Directors must disclose any personal interest in transactions being considered by the board. Failure to do so can make decisions voidable and create personal liability.
3. Every company must maintain transparent board processes, proper record keeping, and clear mechanisms to manage conflicts of interest.

Even though CAMA 2020 has been in place for some time, practical challenges remain for companies, especially when multiple directors have interests in related deals. Transparency in these situations is not just a compliance matter; It is a strategic advantage that builds trust and safeguards the company.

Key Considerations for Directors

To avoid conflict of interest and potential adverse consequences for Directors, Directors should:

1. Identify situations where they may have a personal or financial interest in a transaction;
2. Disclose any such interest in writing to the board before discussions or decisions take place;
3. Recuse themselves from voting or influencing decisions in which they have a conflict of interest;
4. Ensure that all disclosures and recusal actions are properly recorded in the board minutes.

Proper documentation protects both the directors and the company and prevents disputes in the future.

Consequences of Non-Disclosure

Where a director fails to disclose an interest in a transaction, the implications can extend beyond compliance concerns and affect both the company and the individuals involved. In certain situations, this may result in litigation. Ultimately, non-disclosure may lead to:

1. Legal action against the director: The company or affected parties may take legal action against the director, requiring them to account for any benefit derived or respond to a breach of duty in court.
2. Decisions being challenged: Transactions approved without proper disclosure may be questioned and set aside, particularly where the conflict influenced the outcome.
3. Regulatory attention: Non-compliance may attract scrutiny from regulators and affect the company’s governance standing.
4. Erosion of trust: Undisclosed interests can weaken confidence among shareholders, investors, and other stakeholders.

These outcomes are avoidable when proper disclosure and documentation processes are followed.

On the flip side, the benefits of proper disclosure range from more unchallenged Board decisions to a stronger reputation of trust with shareholders, investors, and other stakeholders.

Practical Steps for Companies

To encourage effective conflict disclosure by Directors, Companies can strengthen compliance by:

1. Establishing clear board policies for conflict of interest disclosure in line with CAMA 2020.
2. Standardizing board procedures. This can be achieved by making disclosure and recusal a standing part of board meeting protocols, with proper recording in minutes.
3. Maintain a register of interests, containing an up-to-date record of directors’ interests to support early identification of potential conflicts.
4. Providing training to directors on their disclosure and recusal obligations.
5. Strengthening internal review processes through the use of independent directors or committees to review transactions with potential conflicts.
6. Regularly reviewing board practices to ensure compliance and updating policies when necessary.

Options Open to a Company and Its Shareholders Where a Breach Occurs 

1. Rescission of the Transaction
The company may elect to set aside or rescind any transaction entered into as a result of the undisclosed conflict, particularly where the contract is voidable at the instance of the company.

2. Recovery of Profits (Account of Profits)
The company can require the defaulting director to account for and disgorge any profit, benefit, or advantage derived from the conflicted transaction, irrespective of whether the company suffered a direct loss.

3. Damages for Breach of Duty
The company may institute an action against the director to recover damages for any loss suffered as a result of the breach of duty, including losses arising from unfavourable or prejudicial transactions.

4. Injunction or Preventive Relief
Where the transaction is ongoing or anticipated, the company may seek injunctive relief to restrain the director from continuing with or completing the conflicted transaction.

5. Ratification by Shareholders
In appropriate circumstances, the company may seek ratification of the transaction by the shareholders, provided there is full disclosure of the conflict and the ratification is not tainted by fraud or illegality.

6. Disciplinary Measures or Removal
The company may take internal disciplinary action against the director, including suspension or removal from office, in accordance with its articles of association and applicable law.

7. Derivative Action by Shareholders
If the company fails or refuses to act, shareholders may initiate a derivative action on behalf of the company to enforce the director’s duties and seek appropriate remedies.

Conclusion: Transparency as a Strategic Advantage

For companies and their directors, proactively disclosing and managing conflicts of interest is not just about following the law. It is about building trust, protecting leadership, and strengthening the governance framework of the company.

Transparency allows companies to make decisions with confidence and credibility while maintaining strong relationships with stakeholders.