FLK1 · Multiple-choice practice

FLK1 Business Law — Question 15

Question

Tracy is a director of Xena Ltd, a company engaged in the construction business. She is negotiating a contract with a client, who is a close relative, one of her uncles. Tracy wants to be sure the negotiations are conducted in a way that won’t raise any issues for any of the parties involved. Which of the following statements is correct regarding Tracy’s situation?

Tracy can proceed with the contract negotiation without disclosing her relationship with the client.
Tracy must disclose her relationship with the client to the board and obtain their consent to continue.
Tracy can proceed with the contract negotiation but must obtain the client’s consent to continue.
Tracy must ask another director to sign the contract once negotiations are complete.
Tracy can proceed with the contract negotiation but must inform the client about her fiduciary duty as a director.

Answer and explanation

Correct answer: B. Tracy must disclose her relationship with the client to the board and obtain their consent to continue.

Directors have a duty to avoid conflicts of interest, and in this case, Tracy’s close relationship with the client creates a potential conflict. The conflict needs to be disclosed to the board and permission must be obtained to continue negotiations according to s.177 CA 2006.

Original newsletter explanation ↗

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