The Good Board
Agenda · The board in ordinary times

Conflict-of-interest transactions

Minor procedural short-cuts produce major liability exposure.

Status
First edition · 2026-05-05
Category
Ordinary times
Last reviewed
2026-05-05

Note

References are to Art. 717 OR (duty of loyalty), Art. 717a OR (conflicts of interest, introduced by the 2023 reform), and Art. 718b OR (contracts between the company and its representative).

The company is considering a supply contract with a business owned by the controlling shareholder’s family. A director also sits on the board of the counterparty in a proposed joint venture. The CEO’s spouse’s firm is being retained for a specialist mandate on below-market terms. These transactions are not categorically prohibited by Swiss corporate law, but the procedural architecture that Swiss doctrine wraps around them is unforgiving of shortcuts. A conflict transaction done correctly is unremarkable; one done casually is a durable source of Art. 706 challenge, Art. 754 liability, and — in the group context — shareholder-dispute litigation years after the transaction itself.

1. The duties that bear on this

Undivided loyalty under Art. 717 OR. The duty of loyalty admits no division. A director whose personal interest in a transaction is meaningful cannot serve both the company’s interest and their own on the same decision.

Disclosure and recusal under Art. 717a OR. The 2023 reform codified the disclosure and recusal obligations that were previously doctrinal. A director with a conflict of interest must disclose it without delay; the board then takes measures to protect the company’s interest. The exact measures are proportionate to the conflict — information exclusion, recusal from discussion, recusal from vote, or, in material cases, engagement of a conflict-free committee.

Self-dealing under Art. 718b OR. Contracts between the company and its own representative (including the sole director or all directors acting together) must, above a de minimis threshold, be in writing. The form requirement exists to prevent casual self-dealing and to create a documentary record; in liability litigation, the absence of the required writing is itself the breach.

2. The process

  1. Classify the conflict on a written basis before the board meeting. Is it a director’s personal interest, a related-party transaction (family, business affiliation), a controlling-shareholder interest, or a dual-mandate position?
  2. Disclose the conflict at the outset of the board meeting, with the specific affiliation and scope of the interest minuted.
  3. Calibrate the protective measure: information exclusion at the lightest level; recusal from discussion and vote at the median; conflict-free committee or independent external adviser at the severe. Under-measuring produces later challenges; over-measuring is costless.
  4. Engage an independent external fairness opinion or valuation for transactions of material size or unusual structure. “Material” is proportionate to the company, not to the transaction in absolute terms.
  5. Document the arm’s-length standard being applied, the market comparables consulted, the alternatives considered, and the rationale for preferring this counterparty. This is the affirmative case that the board will need to present if challenged.
  6. Vote with the conflicted director recused; record the recusal and the resulting quorum and vote in the minutes explicitly.
  7. For material transactions, include the transaction and its terms in the compensation or related-party disclosure as applicable, and — for listed companies — in the annual report.

3. Questions to ask management and advisers

4. The record to leave

Conflict disclosure in the minutes with specific affiliation; the commissioning of external advice where obtained; the substantive terms and the alternatives considered; the independent fairness opinion or benchmarking; the recusal record and the quorum/vote entry; and — where applicable — the external disclosure in the annual report or the compensation report. The common failure mode is a minute that says “conflict disclosed, noted by the chair, resolution passed unanimously” without any of the underlying substance. In litigation, this minute is worse than useless; it is evidence of formulaic compliance without actual engagement.

5. Failure modes

Controlling-shareholder-friendly pricing. A recurring supply contract is agreed at terms that, over five years, transfer significant value to the controlling shareholder’s other business. Later acquired by an independent buyer, the company’s new board sues under Art. 754 OR; the absence of contemporaneous benchmarking makes the defence materially harder.

The abstention that was a vote. A director with a conflict abstains from the vote but remains in the room for the discussion, answers questions, and visibly favours the resolution. The formal recusal is procedurally correct; the substantive involvement is not, and later challenge treats the director as having voted.

The unwritten self-dealing. A sole-director company enters a services contract between itself and the director, orally. The statutory writing requirement of Art. 718b OR applies; the contract’s enforceability is compromised, and the fees paid under it are exposed to disgorgement claims.

Cognitive register. Conflict transactions are fertile ground for motivated reasoning (Kunda, 1990): the director who wants the deal to happen unconsciously down-weights the disturbing facts and up-weights the favourable ones. The social dynamic compounds this — directors underestimate their own conflicts because disclosure feels socially costly (“I’m sure I can be fair about this”) and recusal is awkward. And the counterparty’s framing of “arm’s-length terms” often becomes the committee’s starting point, which anchors the fairness analysis before independent benchmarking arrives. Art. 717a OR’s disclosure discipline and the conflict-free committee pattern respond to the structural problem; awareness that the pressure to downplay conflicts is psychological, not merely procedural, lets directors treat the feeling of “I can handle this” as a signal to recuse rather than a signal to proceed.

6. See also