The Director Who Bought the Supplier
Marcus is a non-executive director of Halden Retail plc, a listed company. He also owns 100% of a packaging supplier, Corvex Ltd. Halden's board is considering a three-year packaging contract worth £4,500,000. Marcus does not attend the meeting at which the contract is discussed, and he does not vote. The remaining directors approve the contract after a competitive tender in which Corvex submitted the lowest price. Marcus mentions his interest to the chair beforehand but does not disclose it to the full board or to shareholders. Halden's articles require a director with a material interest to disclose it to the board and to abstain from voting, but they do not require shareholder approval. Six months later, a shareholder discovers the relationship and demands that Halden rescind the contract and recover Marcus's profit. The contract is performing well and Halden has no alternative supplier at short notice.
1. Has Marcus breached his duties? Analyse each relevant duty separately and state the consequences.
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Duty to avoid conflicts of interest. Marcus has a direct or indirect interest in a transaction with the company. Even though he recused himself from the meeting, the duty is engaged. Disclosure to the chair alone is generally insufficient where the articles require disclosure to the board. Marcus should have declared his interest at a board meeting and ensured it was minuted. Breach: likely.
Duty to disclose interests in proposed transactions. The transaction is material (£4.5m, three years). Marcus knew of it and had a personal interest. He disclosed to the chair but not to the full board. The articles require disclosure to the board. Breach: likely.
Duty to act in good faith and promote success. The contract was awarded after a competitive tender at the lowest price. There is no evidence Marcus influenced the outcome. This duty is probably not breached, but the process must be shown to be clean.
Duty not to accept benefits from third parties. Corvex's profit is a benefit from a third party? No - Corvex is Marcus's own company, and the benefit arises from the contract, not from a third party. This duty is not the central issue.
Consequences. The company may rescind the contract, but rescission is barred where the contract cannot be undone or third-party rights have intervened. Here the contract is performing and Halden has no alternative supplier, so rescission is likely unavailable. The company may instead recover the profit Marcus made, or claim equitable compensation, or seek an account of profits. The board should also consider whether Marcus should resign or be removed. The shareholder's demand for rescission is probably not achievable, but a personal claim against Marcus may succeed.
2. What should the board do now to manage the risk, and what would a court consider in deciding whether to grant relief to Marcus?
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Immediate steps.
- Convene the board and formally record Marcus's interest.
- Commission an independent review of the tender to confirm Corvex was genuinely the lowest bid and that no confidential information was shared.
- Consider whether to continue, renegotiate, or terminate the contract. Termination may itself harm Halden, so a cost-benefit analysis is needed.
- Disclose the situation to shareholders if listing rules require it, and take legal advice on market disclosure.
- Review conflicts policies and require annual declarations from all directors.
Court's approach to relief. A court asked to excuse Marcus would consider:
- Whether he acted honestly and reasonably. Disclosure to the chair is a mitigating factor but not full compliance.
- Whether he gained from the breach. He did, through Corvex's profit.
- Whether the company suffered loss. It may have suffered none if the price was competitive.
- Whether he was aware of the articles' requirements. As a listed-company director, he should have been.
- Whether the process was transparent. Recusal from the meeting helps.
Likely outcome. The court may grant relief from liability for the conflict if it is satisfied he acted honestly and the company suffered no loss, but it is less likely to excuse the failure to disclose to the full board. The board should not assume relief. It should negotiate a settlement, possibly requiring Marcus to disgorge part of Corvex's profit or to resign, and should strengthen its governance to prevent recurrence.