Connected Person Rules Ireland: Complete Director's Guide

Who Exactly Counts as a Connected Person?

The Companies Act 2014 defines connected persons comprehensively to capture family relationships, business partnerships, and corporate control structures.

The definition extends beyond immediate family to include parents, siblings, and entities where directors exercise significant influence or control.

This ensures that transactions with individuals or companies closely linked to directors are subject to the same scrutiny as direct dealings, preventing circumvention of shareholder approval requirements.

Connected Person Categories

• Spouses and Partners: Legal spouses, civil partners, and cohabiting partners living as couples.
• Children: Director's children including stepchildren and adopted children.
• Parents: Director's parents including step-parents and adoptive parents.
• Siblings: Brothers and sisters including half-siblings and step-siblings.
• Business Partners: Partners in partnerships where director is a partner.
• Controlled Companies: Companies where director controls voting rights or board composition.
• Trustees: Trusts where director or family members are beneficiaries.

Why Do Connected Person Rules Exist?

These rules prevent directors from circumventing approval requirements by routing transactions through family members or controlled entities. Without connected person rules, directors could easily avoid shareholder oversight by having spouses or children enter transactions instead of dealing directly themselves.

The rules serve multiple purposes: they help prevent self-dealing, ensure transparency so that shareholders are aware of director-related dealings, provide a framework to identify and manage conflicts of interest appropriately.

Furthermore, they protect company assets from being transferred to director affiliates without proper approval.

When Must You Disclose Connected Person Transactions?

The Companies Act 2014 requires directors to declare any interest in proposed company transactions, including connections through related persons. This disclosure obligation applies regardless of the transaction size and must occur at the first board meeting considering the matter.

Disclosure Timing

• Board Meeting Declaration: Announce interest when matter first discussed at board level.
• Written Notice: Can provide written declaration if not attending meeting.
• General Notice: Can give standing notice of interests in specific entities.
• Update Obligations: Must update declarations when circumstances change materially.

What Transactions Require Shareholder Approval?

Substantial property transactions with connected persons require shareholder approval when exceeding 10% of company net assets. This prevents directors from selling company assets cheaply to family members or buying overpriced assets from controlled companies without owner oversight.

The approval requirement ensures transparency and protects the company from self-dealing or conflicts of interest that could harm the business or its owners.

Approval Thresholds

• 10% Net Assets: Calculate using most recent balance sheet figures.
• Non-Cash Assets: Rules apply to property, equipment, intellectual property, not cash loans.
• Acquisition or Disposal: Covers both company buying from and selling to connected persons.
• Market Value: Use current market value rather than historical cost for calculations.

How Do Controlled Companies Work in This Context?

A director is considered to control a company when they can influence voting rights or board composition through ownership, contractual arrangements, or other mechanisms, even if they do not hold a majority stake.

Control can be established through the ability to direct board appointments, exercise dominant influence over management decisions, or act as a shadow director whose instructions are habitually followed by the board.

Shares held by family members of the director are also aggregated when determining control, ensuring that related-party transactions involving partially or indirectly controlled companies are properly scrutinised.

What About Business Partners and Partnerships?

Partners in partnerships where directors are members automatically qualify as connected persons. This captures traditional partnerships, limited partnerships, and limited liability partnerships regardless of the director's specific partnership share or seniority.

Every partner in a director's partnership is a connected person. Recent former partners may still be connected for certain purposes.

In addition, partnerships themselves count as connected persons to director-members.

What Happens If You Don't Disclose Connected Person Interest?

Failure to disclose constitutes a criminal offence carrying fines up to €5,000. Beyond criminal penalties, undisclosed transactions can be set aside by the company, and directors may face personal liability for any losses the company suffers from the undisclosed dealing.

Non-Disclosure Consequences

• Criminal Offense: Summary offense with fines up to €5,000.
• Voidable Transactions: Company can rescind transactions if director failed to disclose.
• Director Liability: Personal liability for losses arising from undisclosed transactions.
• Accounting Obligation: Director may be required to account for profits gained.
• Reputation Damage: Serious corporate governance failure affecting stakeholder trust.

How Should Connected Person Transactions Be Documented?

Proper documentation protects both the company and directors by demonstrating compliance with disclosure and approval requirements. Board minutes should record declarations of interest, discussions excluding interested directors, and shareholder approval resolutions for substantial transactions.

Board minutes should record any director's declaration of interest with specific details. It is important to document shareholder approval for substantial transactions and have clear written agreements detailing all material terms for transactions.

Additionally, obtain independent valuations to support transaction fairness.

Can Directors Vote on Connected Person Transactions?

Generally no - directors with material interests cannot vote on related transactions under Section 228 fiduciary duties.

However, company constitutions may permit voting in specific circumstances, and board quorum requirements must account for interested directors being excluded.

Independent committees may handle certain connected transactions.

What About Gifts and Benefits From Connected Persons?

Directors receiving gifts or benefits from connected persons dealing with the company face disclosure obligations even for modest amounts.

The concern is that gifts from suppliers, customers, or other counterparties who happen to be connected persons could influence director judgment.

We have set out below the disclosure requirements in relation to gifts from connected persons.

Gift Disclosure

• Materiality Threshold: Material gifts require disclosure regardless of personal connection.
• Multiple Small Gifts: Aggregated value over time may trigger disclosure requirements.
• Business Entertainment: Normal business hospitality distinguished from material gifts.
• Family Occasions: Personal gifts at family events generally don't require disclosure.

How Do You Handle Connected Person Issues in Practice?

Establish clear processes for identifying and managing connected person situations before they arise.

In our experience, annual questionnaires asking directors to identify connected persons help maintain current records, while written policies clarify approval procedures and reduce compliance risks.

Due Diligence Obligations

Directors have the following due diligence obligations:

• Reasonable Inquiry: Directors must take steps to identify potential connections.
• Beneficial Ownership: Look through nominee holdings to identify ultimate beneficiaries.
• Corporate Structures: Investigate ownership chains in transaction counterparties.
• Updated Information: Maintain current knowledge of family business interests.

Do These Rules Apply to Small Companies?

Yes, connected person rules apply to all Irish companies regardless of size. Small family companies often have numerous connected person transactions, making proper disclosure and documentation especially important despite the informal nature of closely-held businesses.

Small Company Challenges

• Family Involvement: More frequent connected person situations in family businesses.
• Informal Practices: Must formalise procedures despite small scale operations.
• Documentation Burden: Same requirements as larger companies despite limited resources.
• Valuation Difficulties: Harder to obtain independent valuations for small private company assets.

How Long Do Connected Person Obligations Last?

Connection status generally ends when the underlying relationship terminates - divorce ends spousal connection, leaving a partnership ends partner connection. However, transactions completed while connected remain subject to connected person rules even after relationships end.