Conflict of interest for board members
Conflict of interest for board members
In 2002, a foundation was established with lawyers L.B. and C.S. as directors, both of whom had the right to sign the foundation’s firm alone.
In 2005, the Foundation was awarded a property by inheritance.
From 2011 to 2015, through either L.B. or C.S., it granted most rental apartments to members’ colleagues.
Shortly thereafter, a tenant-owned association was formed for the property (tenant-owned association).
C.S., L.B. and a third person, L.Å., were elected members and were each able to sign the association’s firm.
The property was then cut into two parts, A and B, by the foundation.
In A there were housing, and in B business activities.
Later, A was sold to a management company (the company), which was wholly owned by the foundation.
The company, represented by L.B., then sold the property to the condominium association represented by C.B. and L.Å.
On the same day, the foundation, represented by L.B., sold all the shares in the company to the tenant-owned association, represented by C.B. and L.Å.
In December 2017, the County Administrative Board decided to suspend L.B. and C.S. due to mismanagement of their duties as board members (Chapter 9.
Section 6, Section 3 of the Foundation Act), and submitted an application for final dismissal to the District Court (TR).
District court
The District Court (TR) began by examining whether C.S. and L.B. had acted in a manner that could be considered to be inaquay (Chapter 2.
Section 14 of the Foundation Act).
Since the two were sole directors and had handled the handling of each other’s and their relatives’ leases themselves, TR considered that their conduct was covered by the conflict of interest provision.
Both L.B. and C.S. subsequently handled the sales of A and the shares in the company by representing all parties.
After the sale, tenants (including L.B., C.S. and several of their affiliates) were allowed to buy condominiums at preferential prices.
According to TR, it was therefore clear that the two members had a significant interest in the sale of the property.
Furthermore, since L.B. and C.S. themselves represented all the parties to the A-sales agreements, it was natural that they represented conflicting interests regarding, for example, the price of the property.
Overall, the Court found that the involvement of members in the leases and the purchase agreements had contravention of the conflict of interest provision of the Foundation Act, which in itself would have been sufficient as a basis for dismissal.
Furthermore, since they were repeated and deliberate conduct, rather than negligence, the Court found that they were guilty of serious misconduct and would therefore be suspended.
L.B. and C.S. appealed the case to the Court of Appeal (HovR).
HovR granted leave to appeal, but only stated that it agreed with TR’s assessment and rejected the appeal.
The Supreme Court
Firstly, the Supreme Court (HD) finds that the Foundation Act provides no more precise guidance on the situation than that members who misbehave can be put on leave.
However, in terms of the legal motives, qualified misconduct should be required, which according to HD may include, among other things, exceeding key regulations as well as recurrent and long-standing infringements.
Since there is no detailed guidance, the Court states that the assessment should be made in the circumstances of the individual case.
The Court sees it as clear that L.B. and C.S., through their own and their relatives’ membership in the tenant-owned association, had a significant interest which could have had an impact, inter alia, on the purchase price in the sale of the property, and that they have thus been in conflict.
In addition, there has been a clear conflict of interest between the tenant-owned association and the foundation, regardless of whether both parties benefited from the agreement.
Furthermore, the case has been of great importance to the Foundation, which according to HD makes it particularly important that conflicts of interest do not arise.
The court mentions that the members could have applied to the county administrative board for a good man to represent the foundation and protect its interests, instead of managing the sale themselves.
In conclusion, HD finds that the actions of the members have meant that central regulations have been set aside, which entailed the risk of damage to the Foundation.
The appeal by TR is thus rejected by HD, with L.B. and C.S. remaining relieved of their duties as directors.