Directors' Duties
Ratification by members of a director's breach
Under the common law a director could avoid liability for breach of duty by disclosing the breach to, and obtaining the consent of, by ordinary resolution, the company in general meeting - Regal (Hastings) Ltd v Gulliver. Further, ratification is effective only if the votes of the director in breach (and any member connected with him) are not counted -- s.239(3) and (4) However, where a director has fraudulently expropriated a company asset, the breach is non-ratifiable -- Cook v Deeks
Foster Bryant Surveying v Bryant
⟨ A director will be in breach of his fiduciary duty where his resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself any "maturing business opportunity" sought by his former employer and where it was his position as director that led to the opportunity being acquired. ⟨ Where the director resigns to exploit property, information or an opportunity of a conflict of interest, he will be liable to account.
Consent, approval or authorisation by members
Certain transactions require the approval of the members of the company Part 10, Chapter 4 of the CA 2006 and include: • long-term service contracts (s.188) • substantial property transactions (s.190) • loans, quasi-loans and credit transactions (ss.197-214) • payments for loss of office (ss.215 - 222).
s.173 - Duty to exercise independent judgment
Establishes that directors are required to exercise their own judgment as to the discharge of their duties and as to the issues which confront the board of directors. Company directors may not simply act as the proxies or nominees of other people (includes third parties). It will certainly not be a good defence to an action for breach of a fiduciary duty that a director was simply taking instructions from another person. However, it is not only direction from a third person which is considered (such as the person who ultimately controls a shareholding in the company, or who employs or retains the director in question), but rather it also encompasses senior executives or shadow directors in the company who exercise a de facto power over the directors. In Re City Equitable Fire Insurance there was a senior executive, Bevan, who controlled the other directors so that Bevan was able to commit numerous frauds with the company‟s property. The Enron and WorldCom collapses revealed similar patterns of control by a small group of senior executives.
Harlowe 's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co
The power to issue shares may be exercised for reasons other than the raising of capital provided 'those reasons relate to a purpose of benefiting the company as a whole. This is distinguished from a purpose of maintaining control of the company in the hands of the directors themselves or their friends'
The internal management Rule
The role of the court is not to interfere in the internal management of companies. The orthodoxy here is that the management of companies is best left to the judgment of their directors, subject to the good faith requirement. 'This Court is not required on every Occasion to take the Management of every Playhouse and Brewhouse in the Kingdom.' -- Carlen v Drury (1812)
Loans and guarantees
ss.197-214 CA 2006 do not impose an absolute prohibition on loans to directors (including shadow directors (s.223(1)(c)) and connected persons, but make such transactions subject to the approval of the company's members by resolution and, in certain circumstances, also subject to the approval by the members of its holding company.
Teck Corporation Ltd v Millar
A director may resist a take-over so long as they are acting in good faith, and they have reasonable grounds to believe that the take-over will cause substantial harm to the interests of the corporation. The absence of reasonable grounds will 'justify a finding that the directors were actuated by an improper purpose'. The onus of proof is on the person challenging an exercise of power. (When new shares were issued to prevent a takeover, directors were entitled to consider the reputation, experience and policies of anyone seeking to take over the company. If they decided on reasonable grounds that the takeover would cause substantial damage to the company's interests they were entitled to use their powers to protect the company. Consequently, it was held that it was not correct to say that issuing shares otherwise than to raise capital was always a breach of duty. Further held, 'C had failed to show that the directors had no reasonable grounds for believing that a takeover by Teck would cause substantial damage to the interests of [the company] and its shareholders'.)
S.176(1) - Duty not to accept benefits from third parties
A director must not accept a benefit from a third party conferred by reason of his being a director or his doing (or not doing) anything as director. There is a significant overlap here w/ s.175. The difference is a conflict under s.175 can be authorized by the directors, whereas by virtue of s.180(4), a conflict under s.176 can only be authorized by the shareholders in general meeting. • This includes benefits of any description, including non-financial benefits. However, it will not be infringed if acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest. Also, the company (shareholders) may authorize the acceptance of benefits by virtue of s.180(4).
s.172 - Duty to promote the success of the company
A director when considering what would promote the success of the company for the benefit of its member, must have regard to, inter alia,: (a) the likely consequences of any decision in the long term, (b) the interests of the company's employees, (c) the need to foster the company's business relationships with suppliers, customers and others, (d) the impact of the company's operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company. This section is based on Re Smith & Fawcett: "Directors must exercise their discretion bona fide in what they consider - not what a court may consider - is in the interests of the company". Provided that the directors's decision was honest, it does not matter that it was unreasonable -- Extrasure Travel Insurance. A director must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole (that is, not only to benefit the majority shareholders or any particular shareholders). NB: As is obvious from the statute, the court will not substitute its own view about which course of action the directors should have taken in place of the board's own judgement -- to this extent the duty is subjective. However, there are limits to the subjectivity of the duty. The courts will closely examine the evidence to determine whether or not the directors honestly believed that their actions were designed to promote the success of the company for the benefit of its members. Thus. where the actions or omission causes the company harm, the court will not be easily persuaded the director honestly believed his actions to be in the company's interest. This duty has two elements: • First, a director must act in the way he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. • Secondly, in doing so, the director should have regard (among other matters) to the factors listed in s.172(1). Consequently, the directors may establish what in their professional judgment is most likely to promote the success of the company.
Percival v Wright
Directors only owe duties of loyalty to the company, and not to individual shareholders. This classic case is now codified in s.170 CA 2006. (Some shareholders approached the directors and asked if the directors would purchase their shares. Directors failed to mention that a takeover bid had been made for the company which material affected the value of their shares. The shareholders claimed that the directors were in breach of their fiduciary duty to them and that the sale ought to be set aside for non-disclosure. The court rejected their claim. The duty was owed to the company (that is, all the shareholders, not a few) and, in any case, there was no unfair dealing by the directors. The shareholders had initially approached the directors asking them to purchase their shares.)
S.170 CA 2006
Directors' duties are owed to the company and not to shareholders individually, or creditors, employees, or anyone else. • The result is that, a breach of duty is a wrong done to the company and the proper claimant in proceedings in respect of the breach is the company itself, though members might be able to commence proceedings via derivative claim.
Authorisation: Avoiding liability for conflicts of duty
In a public company, directors will only be able to authorise conflicts if its constitution expressly permits (s.175(5)(b)). In a private company directors will be able to authorise conflicts unless the constitution forbids this. Further, s.175(6) provides that board authorisation is effective only if the conflicted directors have not participated in the taking of the decision or if the decision would have been valid even w/o the participation of the conflicted directors. The votes of the conflicted directors in favour of the decision will be ignored and the conflicted directors are not counted in the quorum. As to the quorum, while the law does not require that all the directors are present at a board meeting, the decisions of board meetings will only be valid if a quorum can be obtained. The quorum for private and public companies are set at two by the model articles, unless the company is private and only has one director, in which case it will be one. Decisions taken at a meeting that lacks a quorum are invalid (such meetings are said to be inquorate). NB: while s.175(5) provides for board authorisation in respect of conflicts of interest, this is not the case with the s.176 duty. However, the company may authorise the acceptance of benefits by virtue of section 180(4).
Knowing assistance
In certain circumstances those who assist a director in the course of a breach of duty will also be held liable for breach of fiduciary duty. The test for determining dishonesty for the purposes of determining the liability of an accessory to the director's breach called the 'combined test'. This asks, first, whether the defendant's conduct was objectively dishonest by reference to the ordinary standards of reasonable people. If the answer is in the affirmative, the second step of the combined test is applied by determining whether there is evidence that the defendant realized that he had behaved dishonestly in the circumstances.
Union Music v Watson
The fact that quorum provisions in the articles require two members' attendance is not in itself enough to prevent the court making an order under S.306 to break a deadlock in favour of a majority shareholder.
s.171 - Duty to act within powers
Under s.171(b), in relation to the directors powers, the director must only exercise those powers for the purposes for which they were granted. Under the case law there have been a number of situations in which, for example, directors have used a power to issue new shares, which was intended to enable the company to raise capital, so as to frustrate a takeover attempt w/o asking the shareholders whether or not they wanted that takeover to go ahead. Consequently, a power intended for one purpose was being used for a different, inappropriate purpose. This section restates the duty requiring a director to comply w/ the company's constitution. It operates to limit the authority of directors even if their action was carried out in what they bona fide believed to be in the best interests of the company. If the duty is breached the director is liable to compensate the company for any loss sustained due to the breach. A director of a company must— (a) act in accordance with the company's constitution, and (b) only exercise powers for the purposes for which they are conferred. [Proper Purpose Doctrine] The company's constitution is defined in s.17 CA 2006 as including the company's articles of association, decisions taken in accordance w/ the articles and other decisions taken by the members, or a class of them, if they can be regarded as decisions of the company.
S.306
Where a disagreement between directors leads to the lack of a quorum, S.306 allows a court to order a meeting. However, it is for the court to decide whether the facts give rise to such an order. In other words, in a two-man company where one of the members refuses to attend the meeting making it impossible to form a quorum, the use of s.306 could overcome such non-attendance. This is provided by way of an application to the court under CA 2006. The court can also give directions that one member of the company present at the meeting will constitute a quorum. The power under s.306 is discretionary, and the court will not allow a member to take advantage of quorum provisions in the articles or a shareholder's agreement to frustrate the wishes of the majority. In such a circumstance it will override such provisions by directing the holding of a meeting.
Howard Smith v Ampol
Where directors exercise a power with mixed motives the court will seek to determine the principal purpose of their conduct. If that is found to be improper, the exercise of the power in question will be voidable, that is, it is capable of ratification at the general meeting (shareholders can either approve or disapprove of the share issue.) However, a member may yet petition the court under s.994 on the basis that the improper use of a power constitutes unfairly prejudicial conduct. (C had 55 percent of shares in company X and wanted to take it over. D made rival bid which was rejected which was rejected by the majority shareholder, C. The directors of X favored D's bid and subsequently issued a batch of shares and allotted them to D, stating the purpose of the issue was (1) to raise capital to purchase a new oil tanker and (2) to reduce C's shareholding to 37 percent, thereby preventing it from rejecting D's bid. C sought a declaration that the share allotment was invalid as being an improper exercise of power (for an improper purpose). Held, where the directors exercise their powers for several purposes the court should objectively determine what is the dominant purpose, that is, if the dominant purpose is proper no breach will occur. Held, the directors had improperly exercised their powers: "it must be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority, or creating a new majority which did not previously exist.")
Charterbridge Corporation v Lloyd's Bank
Where the director has not considered whether his act or omission will promote the success of the company for the benefit of its members, the proper test will be whether an intelligent and honest man in the position of a director of the company concerned, could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company.'
Seven duties for directors
the duty to act within powers (s.171) the duty to promote the success of the company (s.172) the duty to exercise independent judgment (s.173) the duty to exercise reasonable care, skill and diligence (s.174) the duty to avoid conflicts of interest (s.175) the duty not to accept benefits from third parties (s.176) the duty to declare interest in proposed transaction or arrangement (s.177). The duty to declare interest in an existing transaction or arrangement is laid down by s.182.
Remedies
In the case of fiduciary duties the consequences of breach may include: • damages or compensation where the company has suffered loss • restoration of the company's property • an account of profits made by the director • rescission of a contract where the director failed to disclose an interest • injunction or declaration JJ Harrison (Properties) Ltd v Harrison: It follows from the principle that directors who dispose of the company's property in breach of their fiduciary duties are treated as having committed a breach of trust that, a director who is, himself, the recipient of the property holds it upon a trust for the company. He, also, is described as a constructive trustee. The liability of directors in this respect is founded upon their trustee-like status - thus, like trustees, directors will hold any secret profit (i.e. a profit not disclosed to and ratified by the shareholders) on constructive trust.
Re Barings plc (No. 5) [2000]
One of the issues of this case was what level of supervision should be expected of a director. Held, directors collectively and individually had a duty to acquire and maintain a sufficient knowledge of the company's business so as to enable them to discharge their responsibilities. The power delegated did not absolve directors from the duty to supervise the way in which delegated functions are carried out. Thus, the courts will not countenance the argument that the director lacked sufficient time to undertake this task. Barings Bank collapsed following unauthorized trading activities of a trader named Nick Leeson, which resulted in lossess of 827m. The case concerned three directors who allegedly had made serious errors of management in relation to Leeson's activities. The judge held: (i) Directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company's business to enable them properly to discharge their duties as directors. (ii) Whilst directors are entitled (subject to the articles of association of the company) to delegate particular functions to those below them in the management chain, and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions. The extent of the duty and the question as to whether it has been discharge, must depend on the facts of each particular case, including the director's role in the company's management.
S.174 - Duty to exercise reasonable care, skill and diligence
Provides that the standard of care, skill and diligence that would be expected of a director is based on that of a reasonably diligent person with— (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and (b) the general knowledge, skill and experience that the director has. This test imposes an objective minimum standard of care that applies to all directors, irrespective of their individual capabilities. Accordingly, directors can no longer use their lack of skill or experience as a means of lowering the standard of care. Inactivity on the part of directors is no longer acceptable. Therefore little weight is given to any contention to the effect that the director was unaware of a state of affairs because he had trusted others to manage the company. • In re City Equitable Fire, the leading light of the company, Bevan, committed widespread fraud in a notorious corporate collapse in the 1920s. The issue was whether or not some of his fellow directors and the company's auditors were liable to the company for allowing Bevan to do what he did: in particular, those directors who had signed blank cheques for Bevan and the auditors who were alleged to have overlooked fraud with "wilful default". Romer J acknowledged that the "position of a director of a company carrying on a small retail business is very different from that of a director of a railway company", in that large businesses had different challenges for a director from smaller businesses. As Romer J held, "in discharging the duties of his position thus ascertained a director must, of course, act honestly; but he must also exercise some degree of both skill and diligence". It was held that the directors who had signed blank cheques in favour of third parties had not done so in circumstances in which there was anything to have caused them to be suspicious and so they were not liable. So, to begin at the beginning, directors' duties of care towards the company were, for many years, defined by Re City Equitable Fire Insurance Co. These principles have been doubted by s.174 of the CA 2006
S.172(3) CA 2006 [Creditors and Insolvency]
Provides that: "The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company." This duty is in essence made out in Winkworth v Edward Baron Development Co: directors owe a fiduciary duty to the company and its creditors, present and future, to ensure that its affairs are properly administered and to keep the company's 'property inviolate (in tact) and available for the repayment of its debts'.
Relief from liability - S.1157 CA 2006
S.1157 CA 2006, replacing s.727 CA 1985, confers on the court the discretion to relieve, in whole or in part, an officer of the company from liability for: • negligence • default • breach of duty • breach of trust. This can occur in cases where it appears to the court that: • the officer has acted honestly and reasonably • having regard to all the circumstances of the case, he ought fairly to be excused on such terms as the court thinks fit. In Re Duckwari plc (No 2) the point was made obiter that a director who intends to profit by way of a direct or indirect personal interest in a substantial property transaction could not be said to have acted reasonably and therefore would be denied relief under s.1157.
Proper Purpose Doctrine
S.171(b) only exercise powers for the purposes for which they are conferred. The proper purposes doctrine has frequently been applied, although not exclusively, in relation to the power to issue shares; an obvious consequence of which is that the voting rights of an existing majority shareholder may be adversely affected. While a majority shareholder or controlling interest does not have a right of property to prevent a further allotment of shares being made, such a shareholder is entitled to demand that the power be exercised lawfully. Thus, for example, while the directors may believe it is in the best interests of the company to defeat a takeover by allotting shares to shareholders who they trust to reject the bid, that will probably be viewed as an improper exercise of the power to allot shares as it was originally conferred to raise capital: not to increase the voting rights of certain shareholders for some collateral purpose.
Enlightened shareholder value
The CLR considered whether to retain the traditional understanding that companies should be run for the benefit of shareholders or whether a broader stakeholder approach should be adopted. They ultimately proposed that directors should promote 'enlightened shareholder value' (which it termed the 'duty of loyalty'), that is, acting in the 'best interests of the company required directors to maximise the value of the corporation. Thus, in determining whether they are acting with a view to the best interests of the corporation it may be legitimate, given all the circumstances of a given case, for the board of directors to consider, inter alia, the interests of the shareholders, employees, suppliers, creditors, consumers, governments and the environment. At all times, directors and officers owe their fiduciary duties to the corporation. The CLR therefore recommended that the duty should be so formulated as to remind directors that shareholder value depends on successful management of the company's relationships with other stakeholders. S.172, therefore, sets a list of factors, though not exhaustive, but is indicative of the importance that the CLR paid to the wider expectations of responsible business behaviour.
S.417 Business review
The business review, forming part of the directors' annual report, is a narrative report of the company's business activities designed to flesh out the figures contained in the accounts. Its purpose 'is to inform members of the company and help them assess how the directors have performed their duty The statutory objective of the business review is laid down in s.417(2). It provides that: • The purpose of the business review is to inform members of the company and help them assess how the directors have performed their duty under section 172. It is therefore made clear that the review is an integral part of the duty of loyalty. Companies producing a business review must disclose information that is material to understanding the development, performance and position of the company, and the principal risks and uncertainties facing it. This will include information on environmental matters and employees, on the company's policies in these areas and the implementation of those policies. Moreover, key performance indicators must be used where appropriate (including those specifically relating to environmental and employee issues).
S.175 - Duty to avoid conflicts of interest
⟨ A director of a company must avoid a situation in which he has or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. ⟨ S.175(2) provides that this duty arises in particular to the exploitation of any property, information or opportunity and is irrelevant whether or not the company wishes or is able to take advantage of the property, information or opportunity. ⟨ In public companies directors can only authorize a conflict if the constitution provides that they can (the model articles do not contain a provision allowing directors to authorize a conflict). However, in a private company authorization from the directors alone will suffice, unless the constitution says otherwise (the model articles do not prohibit this). ⟨ The authorisation is only valid where the decision considered is met w/o counting the director in question or any other interested director. In other words, the votes of the conflicted directors in favour of the decision will be ignored. Thus if the decision passed because of the conflicted director's vote the authorization is not valid -- s 175(6). Further, if all the directors are or may be conflicted, only shareholder approval will suffice. ⟨ Where a director fails to obtain valid authorization, any resulting contract is voidable at the company's instance, provided that the third party involved had notice of the director's breach -- Hely-Hutchinson v Brayhead. ⟨ In addition, the company can require the director to account for any profit made as a result of the conflict -- Aberdeen Railway v Blaikie • NB: S.175(1) is framed in terms of the possibility of conflict rather than actual conflicts of interest: Duty to avoid conflicts of interest; duty not to profit personally and the duty to declare an interest in a proposed or existing transaction or arrangement.
Hunter Kane Ltd v Watkins (2002)
⟨ After a director retires, where the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself any maturing business opportunities sought by the company and where it was his position w/ the company rather than a fresh initiative that led him to the opportunity which he later acquired, a director will be liable for breach. ⟨ It follows that a director will not be in breach where either the company's hope of obtaining the contract was not a 'maturing business opportunity' and it was not pursuing further business orders nor where the director's resignation was not itself prompted or influenced by a wish to acquire the business for himself. ⟨ After ceasing the relationship by resignation or otherwise a director is in general (and subject of course to any terms of the contract of employment) not prohibited from using his general fund of skill and knowledge, the 'stock in trade' of the knowledge he has acquired while a director, even including such things as business contacts and personal connections made as a result of his directorship. The underlying basis of the liability of a director who exploits after his resignation a maturing business opportunity 'of the company' is that the opportunity is to be treated as if it were the property of the company in relation to which the director had fiduciary duties. By seeking to exploit the opportunity after resignation he is appropriating to himself that property. (H, a director of the plaintiff company, agreed to lease certain commercial premises in order to start up his own business. He then resigned from the company although, unlike IDC v Cooley, he had not at that stage decided upon the nature of the business he would enter. However, shortly after his resignation, one of the plantiff's customers contacted H after being told that the company would be discontinuing its supply to him of a certain type of filter tube. H therefore began manufacturing the filters and supplied them to the customer. Plaintiff sought to hold him liable to account. Held that it was not a breach of fiduciary duty for a director to start up a business in competition w/ his former company after his directorship had ceased, even where the intention to commence business was formed prior to the resignation. On the evidence, H had not attempted to divert to himself a maturing business opportunity, an opportunity which was in the contemplation of Balston Ltd)
Bhullar v Bhullar -- Corporate opportunities
⟨ An incident of the duty to avoid a conflict of interests is the so-called corporate opportunity doctrine. This 'makes it a breach of fiduciary duty by a director to appropriate for his own benefit an economic opportunity which is considered to belong rightly to the company which he serves' ⟨ Any opportunity within the company's line of business is off-limits to the director unless the company's permission to proceed is first obtained. The director cannot be left to make the decision as to whether he is allowed to help himself to its benefit. (Two brothers from two different families for 50 years ran a company that let commercial property. After an argument they parted. Both families agreed that the company would not acquire any further properties. One brother, a director, by chance and not while acting in the course of the company's business discovered a piece of property near to a piece of property the company owned. Through another company that they owned, he acquired the property w/o informing the claimant. C alleged that he acted in conflict with the interest of the company. Held, Although D acquired knowledge of the property in a private capacity, the opportunity to purchase was one that belonged to the company. Whether or not the company could have or would have acquired (company was in the process of being wound up) it is irrelevant.)
Item Software (UK) v Fassihi
⟨ Directors are under a fiduciary duty to disclose a breach of duty, and this duty is a facet of the core duty of loyalty. ⟨ A director has a duty to disclose their own misconduct to the company, and failure to do so is itself a breach of his fiduciary duties. (F was the sales and marketing director of C. C attempted to negotiate more favourable terms for its business with Isograph but was unsuccessful and Isograph terminated its contract with S. In the meantime F secretly approached Isograph with proposals which involved establishing his own company to take over the distribution contract. When S discovered F's misconduct he was summarily dismissed. S brought proceedings against F alleging breach of his duty as a director and employee. Held, the disclosure duty is intrinsic to the over-arching duty of loyalty and, therefore, Fassihi was in breach of his duty of loyalty, by failing to tell Item that he had set another company and planned to acquire the contract for himself.)
Regal (Hastings) v Gulliver
⟨ It is immaterial that the directors acted bona fide throughout the process, or had used their own money, or that the company was financially incapable of taking advantage of the opportunity. ⟨ As to corporate opportunities, a director unless expressly provided, must not place himself in a position where his duty to the company conflicts w/ his personal interest. It matters not that director acted bona fide. Fraud, dishonesty or bad faith are irrelevant. • This is the classic decision on the fiduciary obligation to avoid conflicts of interest. (Owned a cinema and its directors wished to acquire two additional local cinemas and sell the whole undertaking as a going concern. They formed a subsidiary company in order to take a lease of the other two cinemas but the landlord was not prepared to grant the subsidiary a lease on these two cinemas unless the subsidiary's paid-up capital was £5,000. The company was unable to inject more than £2,000 in cash for 2,000 shares and so the original arrangement was changed. It was decided that Regal would subscribe for 2,000 shares and the outstanding 3,000 shares would be taken up by the directors and their associates. Later, the whole business was sold by way of takeover and the directors made a profit. The purchasers of Regal installed a new board of directors and the company successfully brought an action against its former directors claiming that they should account for the profit they had made on the sale of their shares in the subsidiary. Held, the opportunity and special knowledge to obtain the shares had come to the directors qua fiduciaries 'and having obtained these shares by reason of the fact that they were directors of Regal, and in the course of the execution of that office, are accountable for the profits which they have made out of them.') • The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his beneficiary -- Bristol and West Building Society v Mothew
O'Donnell v Shanahan
⟨ It is not for a director to make his own decision that the company would not be interested and to proceed, without more, to appropriate the opportunity for themselves. ⟨ The question of whether an opportunity pursued by directors for their own benefit is within the scope of the company's business (actual or contemplated) is irrelevant when deciding whether directors have breached these duties by taking advantage of the opportunity themselves. ⟨ Directors will be in breach of their fiduciary duty if: • an opportunity arises in the course of their acting as directors for a company; • they take that opportunity for their personal benefit; • they fail to obtain the informed consent of the company. (D had obtained information and the opportunity to purchase the property in the course of acting as directors, which led them straight into a breach of the "no conflict" rule.)
Balston v Headline Filters
⟨ It is not, without more, a breach of fiduciary duty for a director to start up a business in competition with his former company after his directorship had ceased, even where the intention to commence business was formed prior to the resignation. • cf. Foster Bryant Surveying v Bryant
S.175(7)
⟨ S.175(7) brings competing directorships (double employment) into the general prohibition of conflicts of duty. That is, the Mashonaland decision which held that no breach of duty arose where a director held office with two or more competing companies, is now a conflict of duty.
S.180(1)
⟨ S.180(1) provides that if the requirement of authorisation is complied with for the purposes of s.175, or if the director has declared to the other directors his interest in a proposed transaction with the company under s.177, these processes replace the equitable rule that required the members to authorise such breaches of duty. ⟨ This is subject to any enactment or provision in the company's articles which require the authorisation or approval of its members.
Peso Silver Mines v Cropper
⟨ Where a company turns down an opportunity without any improper influence from the director and the director takes it up subsequently, there is no reason why the director should not retain the profit.
Self-dealing directors: ss.175(3) and s.177 CA 2006
⟨ s.175(3) makes it clear that the duty to avoid conflicts of interest contained in s.175(1) 'does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company.' Rather, 'self-dealing' falls within s.177(1). ⟨ S.177(1) provides that: '[i]f a director is in any way, directly or indirectly, interested in a proposed transaction or arrangement w/ the company, he must declare the nature and extent of that interest to the other directors.' ⟨ Put another way, a director can benefit from a contract between himself and the company he serves provided that he makes adequate disclosure of his own interest before the contract is entered into (s.177 CA 2006 - proposed transactions or arrangements). ⟨ Self-dealing rule prohibits a director from being interested in a transaction to which the company was a party.
