Conflicts of Interest after 2014: Report, Report, Report

Substantial changes to be introduced will also affect proxy holders, who should therefore acquaint themselves with the new rules as well.

The first change is that rules regarding conflicts of interest will be distinguished and separated from non-competition rules. Under the current Commercial Code, parties are under a brief provision prohibited from entering into contracts with a company non-competition rules. Also under the current law certain agreements with affiliated parties (including statutory body members and persons related to them) are subject to the rules imposed by Section 196a of the Commercial Code. These include the rigid requirement that, in certain circumstances, an expert valuation or the general meeting’s approval is required before assets can be transferred.

The new Corporations Act is based on the reporting principle: if a member of a company’s statutory body learns that his or her interests may be in conflict with the company’s (for example, the company wants to enter into an agreement with him or her or with a related person), the member is required to inform the company’s supervisory board or supreme body (the general meeting or its members) of the agreement’s terms and conditions before it is executed.

After reviewing the agreement, the supervisory or supreme body may prohibit its execution. Moreover, under the Corporations Act, the supervisory or supreme body will newly be empowered to suspend the particular member from exercising his or her office. Presumably, this power is designed to enable the other body members to review the agreement and, if possible, to agree on its terms and conditions and execute it without the involvement of the conflicted member.

Conceptually speaking, it is interesting that the decision regarding the agreement is entirely up to the shareholders (or the supervisory board) under the Corporations Act. Under current case law, declaring an asset transfer to affiliated parties without an expert report absolutely invalid was justified by the need to protect creditors, among other things. This meant that even if all shareholders of the companies involved agreed with the transfer, the courts would still rule that it was invalid if the rules imposed by Section 196a of the Commercial Code were breached. The reasoning was that a disadvantageous transfer to an affiliated party may damage not only the shareholders but, potentially, the company’s creditors since the recoverability of their receivables may be in jeopardy.

Last but not least, as noted earlier, proxy holders should get well acquainted with the new Corporations Act as it introduces a substantial change applicable to them as well. Under the act, the conflict of interest rules will also newly apply to proxy holders. Bear in mind, however, that proxy holders are supervised by the body that appointed them.