Conflict of interest between administrator-shareholder and the company: when do interests clash?

In a small company, it is very common: the administrator is also a shareholder. He or she manages the company and has a personal financial interest in what happens to that company. In itself, this is not a problem. But what happens if these two roles come into conflict? What if an administrator must make a decision about a transaction from which he or she can personally derive a financial advantage? In that case, the conflict of interest rules under the Code of Companies and Associations (CCA) come into play. This regulation is designed to ensure that administrators always act in the interest of the company, and not for their own benefit.

This article explains when such a conflict exists, how the procedure works, and what the consequences are if the rules are not complied with.

The duties of an administrator regarding the interest of the company

An administrator has a fundamental duty: he or she must always keep the interest of the company in mind. This sounds self-evident, but in practice, things sometimes work differently.

Suppose a company is considering buying a building that belongs to one of its administrators. As a seller, this administrator will want to receive as much as possible. At the same time, as an administrator of the company, he or she will want to pay as little as possible. These two interests are directly opposed and there is therefore a risk that the administrator will prioritize his or her personal advantage over the interest of the company. Such situations, such as the determination of the purchase price of a building where the administrator is the seller, therefore require special attention and proper compliance with the conflict of interest procedure to ensure that the price is market-conform and does not provide an undue advantage to the administrator at the expense of the company.

However, not every situation in which an administrator can derive an advantage constitutes a conflict of interest. When the interests of the administrator and the company run parallel, there is no problem. This is for example the case with the sale of a property in co-ownership where both parties proportionally benefit. Moreover, the law requires that it be an interest of a patrimonial nature: mere emotional or moral involvement is insufficient. This means that an administrator must be in a situation where he or she could enrich themselves at the expense of the company when making the decision or executing the transaction. An affective bond with a co-contractor or a moral conviction is therefore insufficient for the procedure to apply. There must be a concrete financial or patrimonial advantage at stake.

When does the procedure apply?

The Code of Companies and Associations imposes the conflict of interest procedure as soon as four cumulative conditions are met:

Direct or indirect interest

The conflict can be direct (when the administrator is themselves a party to the transaction, for example as a seller of real property to the company) or indirect (when the advantage reaches the administrator through another entity or person).

Interest of a patrimonial nature

There must be a possible financial advantage for the administrator. The administrator must be able to enrich themselves at the expense of the company when making the decision or performing the transaction. A mere emotional bond or moral consideration is insufficient.

Opposition to the company's interest

The administrator's interest must be contrary to that of the company. When both interests coincide (for example, in a proportional distribution of proceeds from jointly owned property), there is no conflict.

Authority of the administrative body

It must be a decision or transaction that falls within the authority of the administrative body. The procedure also applies when no formal meeting takes place but should have taken place.

The procedure applies not only to administrators, but also to liquidators and permanent representatives.

​​​​​​​How does the procedure work?

The concrete approach depends on the composition of the administrative body.

In case of multiple administrators (forming a board)

The articles of association determine whether administrators form a board or not. A board means that administrators must jointly deliberate and decide on administrative decisions.

If the administrators form a board, the procedure works as follows: As soon as an administrator identifies a conflicting interest in themselves, they must inform the other board members before the decision is made and must explain the nature of this conflicting interest. Subsequently:

• the statement and explanation of the conflicted administrator are recorded in the minutes of the board meeting;
• the conflicted administrator may not participate in the deliberations or voting;
• the other board members make the decision jointly and justify it in the minutes;
• the relevant part of the minutes is fully included in the annual report.

If all administrators have a conflict at the same time, the administrative body submits the decision to the general meeting, which must give its approval before the administrators can execute it.

In case of multiple administrators (not forming a board)

If there is no board, the procedure works as follows: As soon as an administrator identifies a conflicting interest in themselves, they must inform their fellow administrators before the decision is made. Subsequently:

• the statement of the conflicted administrator is recorded in the minutes of the administrative meeting;
• the conflicted administrator may not participate in the discussion or voting;
• the other administrators make the decision independently and justify it in the minutes;
• the relevant part of the minutes is fully included in the annual report.

In the example where an administrator wishes to sell his own house to the company, he will inform the other administrators of this conflicting interest and will not participate in the discussion or voting. The other administrators will independently make the purchase decision and justify it in the minutes, which will subsequently be included in the annual report.

If all administrators have a conflict at the same time, the administrative body submits the decision to the general meeting, which must give its approval before the administrators can execute it.

In case of a single administrator

In smaller companies, there is often only one administrator. If only one administrator has been appointed and that administrator has an interest of a patrimonial nature that conflicts with the interest of the company, the decision or transaction must be submitted to the general meeting.

But what if that single administrator is also the sole shareholder? In that case, there is no one else at the general meeting. If the single administrator is also the sole shareholder of the company, he or she may make the decision themselves. This does not affect the other obligations within the framework of the conflict of interest procedure, such as the reporting obligation. This reporting obligation is not merely a formality: the general meeting must clearly set out in the minutes or in a separate report what the decision or transaction concerns, justify the decision made, and also mention its financial impact on the company.

Important: The conflict of interest procedure cannot be circumvented by entrusting the decision to third parties. The law stipulates that the decision must be made by the administrative body or the liquidator themselves (the person appointed to liquidate the company when it is dissolved and who is responsible for settling the company's affairs).

​​​​​​​When does the procedure not apply?

Acts within ordinary management fall outside the scope of application, as do transactions carried out on market-conform terms. The procedure does not apply when the administrative body merely prepares or executes a decision already made by the general meeting.

​​​​​​​Consequences of non-compliance

Administrators who do not respect the rules risk personal liability for violation of the CCA. Other administrators may also be held liable if they fail to ensure compliance with the procedure.

Furthermore, both the company itself and any other interested party (such as shareholders, creditors, or other persons with a legitimate interest) may seek the annulment of decisions or transactions that were made in violation of the rules, if the third party (the counterparty to the contract or transaction by which the company carried out the transaction) knew or should have known of the violation. This is a relative annulment. The consequences can in any case be far-reaching: concluded contracts are reversed, and third parties in good faith are in principle protected.

​​​​​​​Conclusion

A conflict of interest between an administrator and the company is not an exception. This is particularly true in the single-person company, where one person is both administrator and shareholder. It is precisely in this context that it is almost inevitable that personal and business interests intersect at some point. The law takes this into account: when the sole administrator is also the sole shareholder, he or she may make the decision themselves. This does not change the fact that the other obligations of the conflict of interest procedure remain fully applicable. Proper compliance with the reporting obligation therefore remains required at all times, even when there is no one else at the table.

Are you facing a decision about which you doubt whether a conflict of interest exists, or do you have questions about how the CCA regulates this? Do not hesitate to contact​​​​​​​us for advice tailored to your business.

Liselot Roelandt