For directors of marketing agencies and their clients, tickets for that Champions League clash at Highbury or that Twickers crunch match have long been part of the natural order of agency/client relationships. But will the new Companies Act 2006, due in force 1 October 2008, halt the gravy train? Ray Coyle analyses.
When: Not in force until 1 October 2008 but expect to see companies changing their policies in advance to take account of the new legislation.
Where: England & Wales
Law stated as at: 28 September 2007
In November 2006, Parliament passed the Companies Act 2006. At 1,300 sections and 13 schedules, it would be fair to describe it as a fairly weighty piece of legislation. Whether it was fair for Lord Sainsbury to describe 700 pages of new legislation as "simplification" is another matter. Fortunately, the Act is being brought into force in stages, giving you time to consider, in advance, how certain provisions will affect your business.
One of the aims of the Act is to set out, in one place, the duties of directors. These duties have built up over the centuries in the form of common law, equity and legislation. Two of the provisions that will come into force in one year from now should be of considerable interest to all those in the marketing sector, particularly those involved in providing corporate hospitality. Section 175 imposes a duty on company directors to avoid conflicts of interest and section 176 imposes a duty on directors not to accept benefits from third parties.
Because of the far reaching implication of the Act as a whole, many large companies are in the process of analysing their internal policies in order to determine whether they comply with the provision of the Act that are about to come into force. It is likely, therefore, that between now and 1 October 2008, the policies of many companies on the acceptance of corporate hospitality will be reviewed. It is worth understanding the two provisions and how they are likely to be interpreted in order to anticipate and deal with changes to client's policies.
s.175 Duty to avoid conflicts of interest
A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. While it has always been the case, under common law, that a director of a company has a fiduciary duty to act in the best interest of the company, the above provision goes much further. There may be many cases where a director is acting in the interest of the company by, for example, sacrificing his own time to attend a networking event so that he can gain or reinforce contacts that we be of use to the company. However, under the new regime, it could certainly be argued that attendance at such an event would be construed as a situation in which the director can have an indirect interest that possibly may conflict with the interests of the company. This may seem an overly onerous test and, indeed, when the legislation was being debated, it was the government's intention that it be a "heavy duty".
Fortunately, the test has been tempered somewhat by s.175(4) which states that the duty is not infringed in a situation that cannot reasonably be regarded as likely to give rise to a conflict of interest. There is also a mechanism whereby the board of directors can give their authorisation but, for administrative reasons, this is not likely to be seen as an attractive option for many, particularly large, companies. The best option available to those arranging or offering corporate hospitality will be to make it as easy as possible for the company to regard the event as falling within the 175(4) exception. How to do so will depend on the nature of the event but it may help to make it clear in invitations and other literature that no orders will be solicited at the event or to set out clearly the reason that the director is being invited and the potential benefit for the company so that the invitee can make an informed decision whether the event falls within the company's policy.
s.176 Duty not to accept benefits from third parties
Far more problematic is s.176. A director of a company must not accept a benefit from a third party conferred by reason of- (a) his being a director, or (b) his doing (or not doing) anything as director.
Whereas the same suggestions as for s.175 may help get around the second limb of the test, it will be far more difficult to argue that a corporate hospitality invitation has not been extended to a director of a company "by virtue of his being a director". Unfortunately, there is no de minimis threshold so many of the benefits that companies allow on the basis that they fall below a set value, such as £20 per item, will, from October 2008, fall within the legislation. It will no longer be a simple matter to send a director of a client company a bottle of wine at Christmas.
Again, there is an exception made (in s. 176(4)) for the acceptance of a benefit that cannot reasonably be regarded as likely to give rise to a conflict of interest. As the legislation is not in force yet, it is difficult to predict how narrowly this will be interpreted. If a corporate hospitality event is such that it is clear that a "benefit" is being accepted by a director, it may be difficult to argue that this cannot reasonably be argued as likely to give rise to a conflict. It may not actually give rise to a conflict or even be reasonable likely to do so but that does not mean it cannot reasonably be argued that it does. Revised policies on the acceptance of benefits are, therefore, likely to be stringent as, until the law has been tested, many companies will take a conservative approach.
However, those arranging or offering corporate hospitality do have one option open to them. The solution may simply be to extend the relevant invitation to the company rather than the individual. The benefit would then be accepted by the company rather than the director, thus avoiding the application of the new rules, and it would then be for the company to decide who will attend. This approach may not always tally with the interests of the organiser but, if sufficient information is provided on the benefit of attendance, it would be hoped that the organiser and the company would come to the same conclusion on the most suitable attendee.
Why this matters
Organisers of corporate hospitality events should review the way in which they invite potential attendees to take account of likely changes to company's internal rules in order to comply with the new Companies Act. Changes that may help include:
1. Making the benefit to the company (rather than the attendee) clear on the invitation;
2. State that no orders or contracts will be solicited at the event;
3. Consider extending the invitation to the company rather than the individual; and
4. Provide a means for the company's compliance department to make enquiries or the organiser in order to satisfy themselves that attendance will be within the new rules.