Contracting with yourself: remaining objective even when it concerns your own money

Conflicting financial interest

As a director of a company, you must always act in the best interest of the company when making decisions.

However, it is possible that a director (or their permanent representative in the case of a director being a legal entity) has a personal material or financial interest in a decision to be made by (the governing body of) the company that conflicts with the financial interest of the company.

In corporate law terms, this is described as a conflicting financial interest. Purely moral, emotional, or family interests are therefore not meant here.

The conflicting financial interest can be either direct (e.g., the company grants a loan to its director) or indirect (e.g., company X sells real estate to company Y, and the director of company X is (directly or indirectly) a shareholder of company Y).

In legal doctrine, it is usually assumed that the director’s interest must be significant and of a nature to influence their decision (to what extent is the director’s wealth affected?). For example, what if a director holds a small percentage of shares in the contracting company? This must always be assessed on a case-by-case basis, but in case of doubt, due to the risk of liability, it is advisable to apply the precautionary principle and follow the procedure (see below).

Procedure

In the event of a conflict of interest, the Belgian Code for Companies and Associations (Wetboek van vennootschappen en verenigingen, WVV) provides a mandatory procedure to be followed, unless one can invoke one of the legally provided exceptions (such as usual transactions carried out under conditions and with securities that are customary in the market for such transactions).

Depending on the concrete situation (here limited to public limited liability companies (nv), limited liability companies (bv), and cooperative companies (cv)), minutes of the board of directors or the general meeting are required, including the statement and explanation of the involved director(s) regarding the conflicting interest, the nature of the transaction, as well as the justification of the transaction and its financial consequences for the company.

The text about the conflict of interest as recorded in the minutes must be included in the annual report or, if the company is not required to make an annual report, in a document filed together with the annual accounts, so that third parties can take note of it.

When the company has appointed a statutory auditor, this auditor will assess the financial consequences of the relevant transaction for the company in their annual report.

Sanctions

Both the company and anyone with an interest in compliance with the violated legal rule (such as a trustee or creditor of the company) may request the annulment of decisions or transactions that took place in violation of the conflict of interest procedure.

In addition, directors can also be held (personally and jointly) liable for damages resulting from a decision or transaction that took place in compliance with the provisions of the WVV when it nevertheless granted one or more of them an unlawful financial advantage to the detriment of the company.

In other words, it is essential to consider any conflicting interests before making decisions as a director.