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Directors' Duties Ii Notes

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5b. Directors' Duties (II)
Contents
Textbooks...................................................................................................................................................... 137
Gower pp514-533: Overview of the No-Conflict Rules..........................................................137
Transactions with the Company (Self-Dealing)....................................................................137
Transactions between the Company and Directors Requiring Special Approval of
Members............................................................................................................................................... 139
Gower pp540 - 68: Conflicts of Interest and the use of Corporate Property,
Information and Opportunity........................................................................................................... 141
Duty not to Accept Benefits from Third Parties...................................................................145
Remedies for Breach of Duty........................................................................................................ 146
Gower pp576-586: General Provisions Exempting Directors from Liability................148
Relief Granted by the Court........................................................................................................... 150
Liability of Third Parties................................................................................................................ 150
Cases................................................................................................................................................................ 151
Bhullar v Bhullar [2003] 2 BCLC 241............................................................................................ 151
CMS Dolphin Ltd v Simonet [2001] (remedies)........................................................................152
Fulham Football Club v Cabra Estates [1994] 1 BCLC 363...................................................153
Gwembe Valley Development Co v Koshy [2004] 1 BCLC 131............................................153
Industrial Development Consultants v Cooley [1972] 2 All ER 162.................................154
Item Software (UK) Ltd v Fassihi [2004]..................................................................................... 155
Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638................................................................155
Towers v Premier Waste Management Ltd v Fielding [2005] EWCA Civ 923..............156
Allied Business and Financial Consultants v Shanahan (sub nom O'Donnell v
Shanahan) [2009] EWCA Civ 751.................................................................................................... 157
Plus Group Ltd v Pyke [2002] 2 BCLC 201.................................................................................. 157
FHR European Ventures LLP v Cedar Capital Partners [2014] UKLSC 54......................158
Articles............................................................................................................................................................ 158
Grantham, Can Directors Compete with the Company (2003) MLR 109........................158
Prentice and Payne, The Corporate Opportunity Doctrine (2004) 120 LQR 198.......158
Prentice and Payne, Directors' Fiduciary Duties (2006) 122 LQR 558...........................158
Edmunds and Lowry, The Corporate Opportunity Doctrine: The Shifting Boundaries of the Duties and its Remedies (1998) 61 MLR 515.....................................................................160
Kershaw, Does it Matter How the Law Thinks about Corporate Opportunities (2005)
25 Legal Studies 533............................................................................................................................. 160 Farrar and Watson, Self-Dealing, Fair Dealing and Related Transactions - History,
Policy and Reform (2011) 11 Journal of Corporate Law Studies 495..............................160
Gummow, Dishonest Assistance and Account of Profits [2015] CLJ 405........................160
Questions....................................................................................................................................................... 160

Textbooks
Gower pp514-533: Overview of the No-Conflict Rules
Dir = fiduciary - must not place self in position where there is a conflict between their duties to the company and their personal interests or duties to others - Lord Herschell per Bray v Ford [1896] - a strict rule needed as human nature is such that there would be 'danger' of the fiduciary being 'swayed' by improper motives.
The no-conflict rule is reflected in the CA 2006:


No self-dealing transactions - SS175(3), 177, Pt 10, Chs 3 & 4
Dir must not make personal use of company property, information or opportunities: SS175(1), (2)
Dir must not receive benefits from third parties in exchange for exercising their
Dir powers a certain way: S176

These no-conflict rules form the core of the Dirs' duties of good faith and loyalty, which by themselves are too vague to be meaningfully enforced.
Transactions with the Company (Self-Dealing)
The scope of the relevant position
S175 - general duty to avoid conflicts of interest but specific rules on self-dealing transactions are found in S175(3): 'this duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company'.
The normal rules are relatively laid-back and typically just require proper notification and permission being granted by the board. Trustee-like relationship between company and Dir meant that self-dealing transactions could be avoided: Aberdeen Railway Co v
Blaikie Bros (1854) - Lord Cranworth LC pointed out that a company may only act through its officers so any self-dealing transaction can be set aside regardless of how substantively fair it is.
Approval mechanisms
However, this is not a blanket ban on self-dealing: there may be good commercial reasons by contracting with a director, who would have good knowledge of the company's requirements. At common law, this was shareholder approval but this was cumbersome. Many changed their AoA to simply require disclosure to the board not approval by members. This is the position in S177 now.
Proposed transactions - S177, Ch 2 of Pt 10; existing transactions - S182, Ch 3 of Pt 10.
Duty to declare interests in relation to proposed transactions or arrangements Dir who is 'in any way, directly or indirectly; interested in a proposed transaction or arrangement with the Co must declare to other Dirs the 'nature and extent' of that interest before Co enters into arrangement - S177(1); if declaration, once made, later becomes incomplete or inaccurate, further disclosure is required - S177(3).
Purpose of disclosure requirement
Aim of S177 is to put other Dirs on notice of conflict so they can take necessary steps to safeguard Co position - what exactly they must do is within their discretion but inadequate precaution would be a breach of their duties of care and perhaps good faith.
Act allows conflicted Dir to vote and count towards quorum though model articles for public and private Cos (Arts 14 and 16) both exclude this power.
Who is subject to this duty?
S177 - wrt proposed transactions - is a general duty of Dirs, so therefore also applies to shadow Dirs although only 'to the extent capable of so applying' (S170(5)). S182 wrt existing transactions explicitly applies to shadow Dirs per S187(1). Of course there is the argument that shadow directors simply order the real directors what to do so disclosure would be meaningless but the de jure directors do not always do what the shadow director tells them to do.
The interests to be disclosed
Dir to disclose any interest in a 'transaction or arrangement', which includes both contracts and other arrangements - Re Duckwari (No 2) [1998]. Does not matter whether or not the contract is entered into by the board or by one of the subordinate managers.
Direct and indirect interests must be disclosed - eg of indirect - shareholding in company which is the other party or being member of a contracting partnership,
reflecting the common law position - Aberdeen Railway Co v Blaikie Bros.
Dir must disclose nature and extent of relevant interest eg Dir X is a shareholder with Y
% stake (board may decide risk of conflict is de minimis). Blaikie Bros per Lord
Cranworth suggests that personal interests must be disclosed too. Note there is a de minimis requirement for disclosure - if situation is such that 'if cannot reasonably be regarded as likely to give rise to a conflict of interest': S177(6)(a).



S177(5) - Dir only needs to disclose interest where he is aware or ought reasonably aware of both the interest and the transaction.
S177(6)(b) - no need to disclose where the other directors are already aware or reasonably ought to be aware.
S177 - no disclosure wrt single-member boards.
S177(6)© -- no disclosure needed wrt Dir's service contract

Methods of disclosure
S177(2): three non-exhaustive methods -

At a meeting of directors
By written notice to the directors per S184 

By general notice per S185

Meeting / written notice - methods of giving notice in relation to an identified transaction - must be included in the minutes of the meeting or the next meeting. A
general notice need not be wrt a specific transaction but must be brought up at a board meeting or the subsequent board meeting so the board has the chance to discuss the conflict.
Remedies
Breach of S177 subject to civil sanctions - 'the same as would apply if the corresponding common law rule or equitable principle applied' (S178).
At common law - transaction voidable at option of the company unless third party rights have intervened - this was traditionally the only remedy: Re Cape Breton Co (1887).
Only other possibility is if Dir also infringed some other rule in which case the Dir may be liable on that basis eg Gwembe Valley Development Co Ltd v Koshy (N0 3) [2003] -
misuse of company property.
Continuing role for the AoA in setting tighter constraints
S177 compliance means that the remedy of rescission will not be available per S180(1),
notwithstanding the common law position. However, S180(1) specifically operates
'without prejudice' to any AoA provision, so eg there could be a requirement for member approval.
Duty to declare interests in relation to existing transactions or arrangements
S182 - compulsory disclosure to board of existing self-dealing transactions unless that has already been declared wrt a previously proposed transaction. This catches newlyappointed directors who eg may have joined co from a long-term supplier. This disclosure may seem nugatory but may be important eg if company has power to unilaterally terminate if a director becomes conflicted.
Methods of disclosure


Similar to proposed transactions but must be made 'as soon as reasonably practicable' (S182(4)).
S182(2) - may only use the three statutory methods of disclosure mentioned in
S177.
Sole director must only disclose where company is required to have more than one director but that is not the case at the time of disclosure - to be made in writing and deemed part of next directors' meeting: S186.
Explicitly applicable to shadow directors - S187(1) - general or specific notice must be given in writing to the directors and will be minuted as part of the next directors' meeting - S187(2)-(4)

Remedies
Criminal sanction (fine) imposed for failure to disclose here - S183. This is not part of the general duties of directors so the common law rules do not apply wrt remedies. Transactions between the Company and Directors Requiring Special
Approval of Members
S177 CA not enough for all transactions - sometimes, more than board disclosure is appropriate. These provisions: Chs 4 & 4A, Pt 10
Relationship with the general duties
S180(3) - where shareholder approval is needed, board disclosure is not needed.
S180(2) - shareholder approval relieves Dirs of compliance with S175 duty to avoid conflict and S176 duty to not accept benefits from third parties. S281(3) - just need majority approval by members but AoA may increase this to unanimity.
The other general duties will apply to all the directors eg to promote the success of the company and to act within powers
Substantial property transactions
Scope and requirement for shareholder approval
S190 - prior shareholder approval needed for substantial property transactions between company and Dir - a ventilation will ensure a more objectively beneficial deal is reached - Dirs may feel sympathetic / trust etc towards their fellow Dir - British
Racing Driver's Club Ltd v Hextall Erskine & Co [1996].
Substantial property transaction [S1163 - wrt any estate in land or other property]
where Dir acquires or sells to the company a substantial non-cash asset of value which exceeds wither £100K or 10% co net assets (as long as 10% co net assets > £5000,
calculated against book value or paid-up share capital for asset-less companies) per
S191.
Approval must be given either before the Dir enters into transaction or transaction must be conditional on approval being given. If these are not complied with, civil sanctions could apply to director in question, contracting party (eg his company) and directors who authorised transaction - S195. S190(3) - company itself is not liable so as to protect its assets.
Approval is also required wrt transactions with persons connected to the director -
need approval from members of company and holding company within corporate group.
SS252, 253 - 'connected persons' eg spouse but can include a wide variety of factual situations.
Exceptions
Some exceptions to this rule eg transfers within a corporate group - S192(b); S194 -
public stock market transactions exempt; S192(a) - company in liquidation exempted;
does not apply to Dir service contracts which are dealt with under S190(6)
Remedies
S195 - extensive civil remedies in addition to common law remedies: 



Transaction voidable at instance of company unless restitution no longer possible / third party rights have intervened / indemnity has been paid /
transaction affirmed within a reasonable time at a GM - S195(2), S196
Third party is one who is not party to the arrangement or transaction - S195(2)©
so a connected person who is party to a transaction will not count as a third party even if he did not know of the connection with the director
S195(3) - beyond voiding the contract, there is liability to account for any gain made to the company
Where company has avoided contract, the director may still be liable for any losses not recovered and so be liable to indemnify company for subsequent movements in the markets: Re Duckwari (No 2)
S195(8) preserves other remedies
S195(4) extends liability beyond directors to directors of the company or holding company with whom the party to the arrangement is connected where the transaction was with the connected person - director still liable even if he uses a connected person to effect the transaction
S196(4)(d) extends liability to any director of the company who authorised the arrangement or any transaction in pursuance of it even if neither that director not a person connected with him entered into the arrangement

Defences against S195(3) liabilities:

D took 'all reasonable steps to secure the company's compliance' - S195(6)
Connected person / authorising director - if they 'did not know the relevant circumstances constituting the contravention' - S195(7)

Additional rules for listed companies
Premium Listed cos on LSE need to comply with FCA Listing Rules - transactions need approval wrt all 'related party' transactions. Listing rules go much further than CA 2006.

Gower pp540 - 68: Conflicts of Interest and the use of Corporate
Property,
Information and
Opportunity
Scope and functioning of S175




S175(1) - 'a director 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'.
S175(7) - conflict includes conflict of duties
S175(3) excludes self-dealing transactions which are dealt with under S177
Scope - 'exploitation of any property, information or opportunity' of the company
- S175(3)
S175 - approval mechanism = approval by non-conflicted members of the board

Strict approach to conflicts of interest
Issue: making a personal profit may make director carless about promoting the company's interest in taking the opportunity. If there is no actual conflict, then there is no reason why, instrumentally, the Dir should not take advantage of such an opportunity. There is strong overlap between no-profit and no-conflict rule when both are policed strictly.
S175 and no-conflict principle - rigorous approach: S175(1) echoes Lord Cranworth in
Aberdeen Railway - 'possibly may conflict' is sufficient; S175(2) on company opportunities says that it is 'immaterial whether the company could take advantage of the property, information or opportunity' so there is no causation element - but S175(4)
(a) subjects this to a de minimis provision - no failure if the situation 'cannot reasonably be regarded as likely to give rise to a conflict of interest'.
Scope - S175 particularly refers to 'property, information or opportunity'. Misuse of corporate assets is a straightforward breach (though Dir may use company property as his own in one-man companies); corporate information / opportunity give rise to difficulties but recent case law takes a broad view of declaration to board.
Identification of 'corporate' opportunities
Regal (Hastings) Ltd v Gulliver [1943] [HL] - Dirs wanted to buy all the cinemas in
Hastings so that Regal would have a monopoly - they set up a shell company to do this but the bank would not lend them money unless the company was fully capitalised; Dirs could not find anyone else to subscribe to the shares so did so themselves; then sold shell co for big profit due to town monopoly - new Dirs wanted old Dirs to return their capital gains from the sale of the co as it breached the no profit rule. Dirs liable to account for profit made from their personal exploitation of a corporate opportunity once it established 'that what the directors did was so related to the affairs of the company that it can properly be said to have been done in the course of their management and in utilisation of their opportunities and special knowledge as directors; and that what they did resulted in profit to themselves'.
This ratio is based on no-profit but it can be understood in no-conflict terms, the position of the current Act.
Issues of scope
Lord Russell of Killowen, in Regal (Hastings), agreed with the majority but instead emphasised that it was impossible for the Dirs to really have been unable to obtain alternative finance and therefore on the facts brought this upon themselves. Such a reading would fit into the current no-conflict approach, as reflected in S175(2) - does not matter if co could not have taken advantage of opportunity themselves, which is a sensible rule that avoids embroiling court in difficult questions of causation and is a prophylactic rule.
However, the decision in Regal still appears unfair because the purchasers of the company essentially got a partial refund on the purchase price and the old directors previously held a majority of shares in the company and could have therefore forgiven themselves at an AGM had they been properly advised. Further, the directors who subscribed through 'nominees'/'friends' were not found liable, and the company solicitor who owed fiduciary duties to the company was not found liable as he had acted with the full knowledge of the board and so was absolved.
Four main cases of concern:

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