Should a non-executive director invest in the company?

Section 177 of the Companies Act 2006 requires a director who is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company to declare the nature and extent of that interest to the other directors before the company enters into it. The declaration can be made at a meeting, by notice in writing, or by general notice. If it later turns out to have been incomplete or inaccurate, a further declaration is required.

Section 182 covers the same interest where the transaction has already been entered into. That duty is enforced differently: under section 183 a director who fails to comply commits an offence and is liable to a fine. Section 177 is enforced through the civil consequences of breach of duty rather than by prosecution, which is a distinction worth understanding but not one to rely on.

Alongside those, section 175 imposes a standing duty to avoid a situation in which the director has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. A shareholding is exactly such a situation. The board can authorise it, and in a private company the articles or a members' resolution commonly do so, but the authorisation has to exist rather than be assumed.

Three places, and all three should agree. The board minute for the meeting at which the declaration was made, the company's register of directors' interests if it keeps one, and the appointment letter. If the investment is made at the same time as the appointment, say so in the letter: it is the cleanest evidence that the shareholding predates any decision the director later takes.

Keep the extent as well as the nature. "The director declared an interest" is not a declaration of extent: record the share class, the amount subscribed and the percentage held on a fully diluted basis, because that is what a future investor's diligence will ask for.

Article 14 of the model articles for private companies provides that where a director is in any way interested in a proposed transaction or arrangement with the company, that director is not to be counted as participating in the decision-making process for quorum or voting purposes. Many companies amend article 14, and many shareholders' agreements add their own conflict provisions, so read the company's actual articles rather than the default.

In practice the moments that matter are narrow and predictable. A director who is investing in the round should not be in the vote approving the terms of that round, the valuation, or the allotment of their own shares. The same applies to anti-dilution, a bridge they are funding, or an exit where their share class is treated differently from another.

Recusal is not an admission of anything. A board that records one looks competent; a board where the investing director voted on their own subscription price does not.

Investing on the same terms as the round, at the same price, in the same instrument, is the simplest arrangement to defend. A director subscribing at a discount to the price other investors are paying at the same time needs a reason that survives being read out loud, and the approval of the people paying the higher price.

Order matters too. Where the appointment and the investment are agreed together, agree the fee separately from the subscription. Equity issued instead of a fee is remuneration and should be described as such. Shares bought for cash are an investment. Blending the two is what makes both harder to explain, to the company's auditors and to HMRC.

For EIS, HMRC treats an individual as connected with the company as a director if they receive a payment from it other than a permitted payment, and a connected investor cannot claim relief. Reasonable remuneration for services as a director can fall within the permitted payments, and the exception described at VCM11070 exists specifically so that business angels who join the board are not discouraged, provided they were not connected with the company before the shares were issued.

That is a summary of guidance, not advice on your position, and the detail turns on facts that are specific to you. The practical instruction is simple: raise it with the company's advisers before the shares are issued, because the connection test looks at a period that begins before the investment and the position cannot be fixed retrospectively.

On a listed board, independence is a formal determination the board must make and explain, and the UK Corporate Governance Code sets out the circumstances that may impair it, including links to a significant shareholder. On a private company board there is usually no such determination to make, and most institutional investors would rather have a director whose own money is in the company than a technically independent one who is indifferent to the outcome.

Being honest about it is what protects the board. Say out loud which directors are independent of the cap table and which are not, and make sure at least one voice at the table is genuinely able to disagree with the largest shareholder. A section 172 duty is owed to the company and its members as a whole, not to the share class the director happens to hold.

Read the articles for conflict and voting provisions. Declare the nature and extent in writing before the transaction, and get the minute right. Agree your recusal rule for round, bridge and exit decisions. Keep the fee and the subscription separate. Check directors' and officers' cover responds to you. Take tax advice before the shares are issued.