How to solve a situation of “last man standing” when applying article 7:96 BCCA
Sometimes, directors are conflicted with a decision to be taken by the board of directors. Article 7:96 of the Belgian Code of Companies and Associations (“BCCA”) provides for specific rules to be followed in such a situation and amongst others prohibits conflicted directors to participate in the deliberations of the board of directors on these transactions nor in the vote in that respect.
The application of Article 7:96 could lead to problematic situations when (i) multiple directors are conflicted and the quorum of presence is not reached, or, even worse, (ii) when only one director is not conflicted (i.e. the “last man standing”). Can the board directors validly deliberate in situations under (i) or can a solo director decide alone on behalf of the board of directors in situations under (ii)?
This newsflash will focus on the rules to be followed in the event of a conflict of interest and on potential solutions available, should the application of Article 7:96 leads to situations where the quorum of presence is not reached or to a situation of “last man standing”.
Article 7:96 BCCA under the microscope
The rules provided for in Article 7:96 BCCA apply to a situation where one or more directors within the board of directors of a public limited liability company (SA/NV) have a direct or indirect financial interest that conflicts with the interest of said company following a decision or a transaction falling within the competence of the board of directors.
For example, a company would like to lease a warehouse that is owned by one of the companies directors or would like to grant a loan to one of the directors. Another example could be found in the situation where the board of directors would be envisaging to distribute an interim dividend while one of the directors is also a shareholder of the company.
In the event of a conflict of interest, Article 7:96 BCCA provides for the following rules:
- The conflicted director must inform the other directors of the conflict of interest;
- The conflicted director cannot participate in the deliberations of the board of directors;
- The conflicted director cannot vote on the decision subject to the conflict of interest;
- The declaration of the conflicted director regarding the conflict of interest, including explanations on the nature of the conflicted interest must be included in the minutes of the board of director’s meeting;
- The minutes of the board of director’s meeting must contain an explanation as to the nature of the decision to be taken that is subject to conflict of interest, the decision that is finally taken on that subject, the financial consequences of such decision and the justification for the decision taken;
- The auditor of the company (in case there is one) will need to analyse in a separate section of its annual report, the financial consequences of the decision that was taken by the company.
If all the directors are conflicted, Article 7:96 BCCA says that the decision must then be taken by the general assembly.
Sanction in case of non-respect of Article 7:96 BCCA is serious: not only the company but since the introduction of the BCCA also any person having an interest to do so ((minority) shareholders, bondholders, other directors,…), can request the nullity of the decision taken in contradiction with Article 7:96 BCCA.
Problematic situations generated by the application of Article 7:96 BCCA
The BCCA remains silent as how to tackle a situation where further to multiple directors having a conflict of interest, the quorum of presence within the board of directors would not be reached or even worse, there would only be one director left that is not conflicted.
Those questions are not purely theoretical. They do occur in practice more often than one might think, namely due to the increased use of very specific procedural rules within the board of directors (e.g. in terms of strengthened quorum of presence, presence of a minimum number of directors of a certain category…) as provided for in articles of association or in shareholders’ agreements. The balance of powers within a company is something that can be quite fragile. If specific rules are in place to govern the way the board of directors is working, the application of the conflict-of-interest rules could mean a threat for the balance that was created by the shareholders when providing for these specific rules.
Currently, the doctrine is divided between scholars considering that in such situations, the general assembly should have the powers to deliberate and decide, and scholars insisting that the power to decide remains within the board of directors despite the quorum not being reached.
None of the solutions above mentioned are satisfactory in our opinion:
- Should the board of directors remain competent to take the decision while the quorum is not reached, the balance within the company could highly be endangered. Moreover, pushed to an extreme, this solution would contradict the collegiality principle in the event of “last man standing”.
- Should the general assembly take the decision, this contravenes the separation of powers between the board of directors and the general assembly provided by the BCCA which are of mandatory nature, without having considered that such solution is only provided for by Article 7:96 BCCA in case all directors are conflicted.
The risk is that an unhappy (minority) shareholder or director might leverage on the lack of clarity of the BCCA in such specific situation to request the nullity of the decision taken.
Solutions preferred
In practice, some companies confronted with this problem decide to combine both approaches by having the unconflicted director(s) taking the decision and getting a confirmation/ratification of such decision by the general assembly. This does not solve the issues raised above in our opinion.
A better solution to envisage would be for the general assembly to temporarily (or not) appoint additional director(s) that are not conflicted so as to allow the newly composed board of directors to take valid decisions based on the required quorum of presence. Once the board of directors has taken the decision, the general assembly could simply decide to revoke the newly appointed directors and terminate their mandate.
Of course, we understand this solution is far from being easy to implement in practice. More often than not, the appointment of new directors will be the source of discussion and debates between the shareholders (especially in situations with strong minority shareholders or in joint ventures). But this is currently the only solution which seems to be outside criticism, ensuring that the decision taken will not be challenged and that no interested party will be able to request its nullity.
As long as we will have to wait for a rectifying Companies Act, we therefore strongly advise companies to address these types of situation in their own articles of association and which could then perfectly foresee in a transfer of the decision power to the shareholders’ meeting. Those companies would then have a go-to solution in the event such a situation crystalises and it would be far more difficult, if not impossible, for anyone to challenge a decision that is taken in accordance with the articles of association.
Should you have any questions, please do not hesitate to reach out to our team!
