Conflicts of corporate interests. What is the difference from corporate disputes? How to resolve without harm to business.

Contents:

• The most common types of conflicts of interest
• Prevention of conflicts of interest and personal conflicts of interest
• The procedure and methods of resolving conflicts of interest that have arisen
• Possible responsibility for creating a conflict of interest
• Why is it necessary to resolve conflicts of interest?

Classic corporate disputes represent several contradictions between LLC participants about business development and doing business in the organization.

Conflicts of corporate interests are situations in which the personal interest of one entity runs counter to the interests of another person or the policy of the company. In general, such conflicts are considered broader than corporate disputes, since they affect a larger number of subjects related to the company. Different interests may appear between two LLC participants, between a participant and an employee of the company.

Both corporate disputes and conflicts of corporate interests, under certain conditions, can create a negative entrepreneurial image for contractors and the media, as well as lead to unhealthy working relationships within the team. Such factors have a negative impact on the development of the corporation, and on each employee in particular.

In this article, we will consider the grounds for the development of a conflict of interest and give a legal assessment of various options to prevent or get out of such a situation.

The most common types of conflicts of interest

Legal practice shows that conflicts of corporate interests in various companies are a frequent occurrence. And it occurs in one form or another in every third large company.

It is possible to identify conflicts of interest within an enterprise if you know their types and consider the specifics. 

There are:

1. Professional disagreements within the business.

As a rule, such conflicts raise the company’s image by conducting questionable transactions. This happens if the first partner is ready to raise the company slowly but qualitatively to a high level, and the second participant is ready to ship a large batch of products at a reduced price and to a dubious address to document a large volume of sales.

2. Disputes between the management of the company.

Perhaps this type of conflict of interest is the most common and widespread in legal practice. Of course, each of the managers has his own strategy and tactics, according to which the company should develop. However, when certain conditions occur, different visions can result in differences of interests. Most often this happens with a large increase in the company’s profits. In this case, one partner wants to invest profits in expanding production and improving technologies, and the second partner wants to increase sales and open representative offices in other regions. This type of conflict of interest is the most serious, as it leads to a halt in progress and a slow disintegration of the company.

In addition to the main ones, the following types of conflicts of interest can be distinguished:

• Between the seller of the company’s shares and the buyer interested in the acquisition.
• When the director is dismissed, and a new management is formed.
• Conducting transactions with interested contractors or contractors.
• Disagreements over the number of dividends paid or conflicts due to the “freezing” of dividend payments for an indefinite period.
• Disagreements about the meeting of shareholders or participants of the company, where decisions were made that infringe on the interests of other entities.
• Conflicts between bosses and subordinates.
• Disagreements between the management and the trade union of employees of the enterprise.

The most unpleasant conflict of interest for the company’s management is corruption within the company. As a rule, corruption should be understood as the use by an employee of his official position for matters related to obtaining personal benefits bypassing the opinion of his superiors. This contradicts ethical principles and, in many respects, the legislation of the Russian Federation, in particular:

• Commercial bribery.
• Abuse of official authority.

As a rule, a conflict of interest in the form of corruption always involves receiving material reward to the detriment of the interests of the company.

Corruption is especially strong in those areas of activity where the company’s employees have access to certain resources and can influence their distribution. In the commercial sector, this is most often found in the procurement industry, project departments, and management. As a rule, officials can receive remuneration when making transactions, recruiting personnel, working with contractors. Under certain conditions, this type of corruption, which is often called business, may fall under criminal jurisdiction. However, any kind of bribery harms the company.

Prevention of conflicts of interest and personal conflicts of interest

Most corporations in Russia take individual preventive measures to prevent conflicts of interest within the enterprise. As a rule, such events are aimed at compliance with the norms of corporate ethics and resolving disputes that have already arisen without involving third parties. First, the management of each enterprise strives to:

• reduce the possibility of receiving material remuneration from other entities for making official decisions.
• exclude receiving benefits from the presence of employees in the company from family members, relatives, close acquaintances.

The practice of corporate jurisprudence shows that to achieve these goals, it is necessary to carry out a number of measures:

• To obtain the maximum amount of data on a possible conflict of interest when hiring a new employee. This applies to checking family members or immediate relatives who may be related to potential contractors, contractors or competing firms.
• Constant monitoring of information for the appearance of a conflict of interest among the company’s employees. Depending on the scale of the enterprise, such monitoring can be carried out monthly, quarterly, or annually.
• Carrying out similar work in relation to contractors and contractors of the enterprise.

One of the most effective ways to take measures to prevent or resolve conflicts of interest is to create a special collegial body at the company. The official duties of its members may include:

• Settlement of possible disagreements that are on the verge of a conflict of interests.
• Work on resolving identified disputes with respect to employees, management, and management of existing branches.
• Search for facts and information about violations of corporate ethics and the company’s charter.
• Receiving and responding to incoming calls.
• Solving other issues related to the prevention of conflicts of interest.

Other popular ways to resolve conflicts of interest include:

1. Official encouragement of employees.

Individual motivation in the form of bonuses or valuable gifts shows a decrease in the frequency of using the official position for selfish purposes.

2. The presence of a clear motivation system.

In addition to the fact of awarding their employees, the chosen motivation system should be clear. Currently, more and more managers are choosing a KPI system that shows the employee’s effectiveness, measured by numerical indicators – the number of attracted customers, the implementation of the plan or the amount of revenue attracted.

3. Working with clients.

If we are talking about sales or procurement, then attracting reliable and solvent customers is the key to getting a high commission by the manager and reducing the likelihood of using official position.

4. Signing of contracts by several officials.

5. Verification of counterparties.

Having information about how long the company has been operating in the market, what its reputation is, whether there are credit debts and high-profile court cases will help to draw up an important portrait of the company and understand whether there are risks of a conflict of interest.

6. Develop a strategy of behavior in disputable situations in advance.

A corporate agreement defining the restriction on the purchase of shares, the rules of inheritance of shares and the conditions for withdrawal from the LLC participants will help to avoid disagreements when doing business.

The procedure and methods of resolving conflicts of interest that have arisen

Usually, when a conflict of interest is suspected or arises, the parties try to resolve disagreements within the company to avoid reputational risks. However, this option is most common when disputes arise between an employee and a company. If we talk about the conflict between shareholders, then such disputes often reach the court.

Conflicts of interest are considered by the Arbitration Court of the Russian Federation. As part of the consideration of the case on the merits, the plaintiff must provide evidence of the opponent’s guilt. If necessary, the court calls witnesses or conducts the necessary examinations.

Legal proceedings in case of a conflict of interest are often costly and are accompanied by publicity in the media. An alternative method of resolving such a dispute is the conclusion of a settlement agreement. This option not only reduces the legal costs of the two parties, but also allows you to find a mutually beneficial mechanism to get out of the situation. With a favorable completion of the process, the parties conclude a settlement agreement, where the interests of the opponents are prescribed with the subsequent implementation of the agreements.

It is worth noting that legal proceedings in case of a conflict of interest may take months.

Possible responsibility for creating a conflict of interest

Most often, disciplinary measures prescribed in the company’s charter are applied to participants or initiators of a conflict of interest. This is one of the types of extrajudicial coercion, which is regulated by labor and administrative law.

Of the main types of disciplinary responsibility, one can distinguish:

• Penalties.
• Reprimand.
• Demotion.
• Suspension from certain types of work.
• Dismissal.

As a rule, before applying one of the types of disciplinary responsibility, an internal audit is conducted, within the framework of which detailed explanations of what happened are taken from the employee. Based on its results and in accordance with the severity of the offense, a decision is made to punish the official.

Disciplinary punishment must be applied within six months from the date of the commission of an illegal action within the framework of a corporate conflict. In case of disagreement with the company’s decision, the punished person has the right to appeal the decision in court.

It should be noted that the criminal liability of an employee of the company occurs only in cases of committing a crime.

Why is it necessary to resolve conflicts of interest?

As we noted earlier, some conflicts of interest can lead to serious financial losses on the part of the company. However, with due attention and efforts to resolve it, this can be avoided. Among the positive examples of successful resolution of the conflict of interests is the deal of Rosneft on the purchase of Bashneft. Thus, the new shareholders of Bashneft filed a lawsuit against the former shareholders of AFK Sistema demanding to pay 170.6 billion rubles in losses for the reorganization of the oil company. The litigation could have ended in the bankruptcy of AFK Sistema, however, with the active participation of the two sides, the opponents were able to sign a settlement agreement and agree to reduce the amount of claims on the claim.

In general, the resolution of conflict situations related to personal interest makes it possible to identify a weak point in business. With the personal enrichment of individual employees, an entire department can record a loss.

VALEN’s lawyers have considerable experience in protecting the interests of corporate clients and are ready to provide legal support in resolving the conflict of interests that has arisen.