Conflict of interest in the company: what do you need to know?
What is a conflict of interest in a company?
When managing a company, situations may arise in which a director has a personal interest that conflicts with the interest of the company. In that case, there is a conflict of interest.
The legislator has provided a specific conflict-of-interest procedure for this. That procedure ensures transparency and protects both the company and its stakeholders. It is important to know how to deal with this, as incorrect application may lead to far-reaching sanctions, including nullity of the transaction and directors’ liability.
When must you follow the conflict-of-interest procedure?
The conflict-of-interest procedure applies when the governing body must take a decision in which a director has a conflicting interest. In practice, three elements are usually relevant in this respect.
First, it must concern a decision for which the governing body is competent . If the power lies with the general meeting, such as, for example, in the repurchase of own shares, the conflict-of-interest procedure does not need to be followed. This was confirmed by the Court of Cassation in a judgment of 17 January 2025.
In addition, there must be a financial interest. This may consist either of obtaining a material benefit or avoiding a material disadvantage. Even a potential interest may be sufficient, and it may concern either a direct or indirect financial benefit. Family, political or ideological interests do not fall within this scope.
Finally, the director’s interest must conflict with the company’s interest. A classic example is the sale of a movable or immovable asset by a director, for example a building, to the company: as a director, it is in his or her interest for the sale price to be as high as possible, whereas the company has an interest in keeping the sale price as low as possible.
When does the conflict of interest procedure not apply?
The law provides for several exceptions to the obligation to follow the conflict of interest procedure.
For example, the procedure does not apply to legal transactions between companies where one company holds at least 95% of the voting rights in the other company (parent-subsidiary relationship), or to transactions between two companies in which, in each case, 95% of the voting rights are held by a third company (sister company relationship). It is important to emphasize that this exception does not apply within a public limited company (NV) or private limited company (BV) in which the sole shareholder also acts as the sole director.
In addition, the conflict of interest rules do not apply to customary transactions carried out under market-conform conditions. Whether this is the case must always be assessed on the basis of the specific factual circumstances.
Which procedure must you follow in the event of a conflict of interest?
The procedure for conflicts of interest differs depending on the type of company and its governance structure. Directors with a conflict of interest must report this to the other directors before any decision-making takes place and may not take part in the deliberation or vote on the matter concerned.
When all directors have a conflict of interest, the general meeting decides. The same prior notification obligation also applies when directors are individually authorized to act. If only one director has been appointed and that director has a conflict of interest, the general meeting also decides.
What formalities must you comply with?
When the conflict of interest procedure applies, a (special) report must be drawn up in a private limited company (BV), cooperative company (CV) and public limited company (NV).
This report sets out the nature of the decision in which a conflict of interest exists. In addition, the proprietary consequences for the company are explained and the reasons why the management body is taking this decision are stated.
If the director with a conflict of interest in a BV or NV is also the sole shareholder, the agreements concluded between the company and that director must also be included in the special report.
The report on the conflict of interest is then added to the annual accounts, or to a document filed together with the annual accounts. In this way, external parties can also be made aware of the existence of a conflict of interest within the company.
If a statutory auditor has been appointed, the special report is also provided to the auditor. In the annual report, the auditor then assesses the proprietary consequences of the act for the company.
What does this mean for your business?
If the conflict of interest procedure is not followed (or not followed correctly), this can have significant consequences. In certain cases, the company may seek the nullity of the transaction, in particular where it can demonstrate that the other party involved in the transaction knew or should reasonably have known that a conflict of interest existed. Any interested party may also request the annulment of the transaction if the conflict of interest procedure was not properly followed.
In addition, directors may be jointly and severally and personally liable for the damage suffered by the company or by third parties where the transaction has resulted in an unlawful financial benefit for the director(s) concerned to the detriment of the company. It is important to stress that this directors’ liability may also arise even where the conflict of interest procedure was applied fully in accordance with the applicable rules and both the notification of the conflict and the reporting obligations were complied with.
Of course, failure to comply with the conflict of interest procedure, or applying it negligently, may in itself also give rise to liability for the directors.
Need tailored advice?
Are you unsure whether the conflict of interest procedure was or must be applied correctly in your specific situation? Or are you facing a transaction in which a director may have a conflicting interest? Our specialists from the Corporate and M&A team will analyse your situation and guide you through every step. Contact us for focused, practical advice.