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Law Notes Company Law Notes

Directors' Duties 2 Notes

Updated Directors' Duties 2 Notes

Company Law Notes

Company Law

Approximately 805 pages

Company law notes fully updated for recent exams in the UK. These notes cover all the major LLB company law cases and so are perfect for anyone doing an LLB in the UK or a great supplement for those doing LLBs abroad, whether that be in Ireland, Canada, Hong Kong or Malaysia (University of London). These notes were formed directly from a reading of the cases and main texts and are vigorous, concise and very well written.

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Sections 175-177 replace old fiduciary duties of loyalty as follows:

Section 175 – no-conflict rule

incorporates no-profit rule insofar as it overlaps with no-conflict rule

Section 176 – no-profit rule, insofar as it concerns bribes or secret commissions from third parties

Section 177 – self-dealing rule

Applies where director is entering transaction with company

SECTION 175

Section 175(1): director must avoid a situation in which he has or can have an interest which conflicts or might conflict with interest of company.

Section 175(6): also applies where D has conflict of duties.

Section 175(3): duty does not apply in relation to D’s transactions with the company

i.e. where D is entering into transaction with company, relevant duty is s.177

Applies if D makes use of property, information or an opportunity belonging to company.

Diversion of Corporate Opportunities

Is breach where director exploits an opportunity of commercial interest to the company

i.e. personal interest has come into conflict with duty to company

Section 175(2): immaterial whether company could have taken advantage of the property, information or opportunity exploited by D

Thus is breach even if:

company would not have actually made use of the opportunity

Bhullar v Bhullar [2003]

company had already declined the chance to take up offer

Boardman v Phipps [1967]

Directors Who Resign

Is not breach of duty to:

merely plan to compete with company whilst still a director

Balston Headline Filters [1987]

or taking steps in preparation which do not amount to conflict of interest

Foster [2007]

However director resigning his directorship may be liable under where after his resignation he exploits property of former company.

Property of former company may be either:

  1. Existing work of former company (e.g. clients, contracts)

  2. Maturing business opportunity

    i.e. developing opportunity which D encountered in capacity as director, and which was thus property of company

  3. or information/trade secrets of former company

  • Foster v Bryant [2007]

    There must be some sort of ‘link’ between resignation and taking up of the business

    In absence of bad faith whilst still a director, is no breach of duty

    Foster v Bryant [2007]

Relevant Factors

Whether D is liable for use of maturing business opportunity depends on:

Ripeness of opportunity

How long after resignation D takes up opportunity

Circumstances of termination of D’s directorship

  • Foster v Bryant [2007]

    D less likely to be liable where he has not resigned out of any desire to appropriate company’s property

    Although even if this case, still liable if he breaches no-profit rule prior to resignation taking effect

    Foster v Bryant [2007]

Duties of Disclosure

Suggested that a director who intends to resign to start competing business must declare this intention as soon as it becomes ‘irrevocable’

and that other members of board who know of this directors’ intention are also under duty of disclosure

Shepherd Investments Ltd [2006]

Though contradicted in Framlington [1987]

Duty probably falls under s.172 by analogy with Item Software [2004]

Limits

Duty has become smaller

Where D excluded from running of company, s.175 duty practically non-existent

i.e. if D has no say in how company run, conflict of interest cannot arise

Plus Group v Pyke [2003]

However even where C is forced out of company, has duty not to put himself in position of conflict whilst he is still director.

Foster v Bryant [2007]

No possibility of conflict of interest

Section 175(4)(a): is no breach if situation cannot reasonably be regarded as likely to give rise to conflict of interest

Thus unlikely to be breach where:

  1. Opportunity falls outside company’s present range of business activities

    e.g. company is not accustomed to pursuing such opportunities

  2. Company has decided not to pursue the opportunity

    E.g. Queensland Mines v Hudson [1978]

Competing Directorships

Pre-2006 Approach

  1. Traditionally thought that mere holding of competing directorships is no breach of duty

    i.e. is no rigid rule preventing this

    Mashonaland [1891]

    Approved in Bell v Lever Bros [1932] (HL)

  2. This proposition questioned in later case

    but not overruled

    Plus Group v Pyke [2003] (Sedley LJ)

  3. Even if potential conflict of interest, can be remedied by consent of boards of both companies

    Ultraframe [2005]

  4. Ultimately whether there is breach is fact-specific question

    e.g. Plus Group v Pyke [2003]

  5. However is always breach of duty where competing directorships causes actual conflict of interest

    e.g. where D divulges one company’s information to another

Post-2006 Approach

Section 175(5): section applies to conflicts between a duty and a duty

This inclusion may mean courts will be harsher in treatment of competing directorships

i.e. so that Mashonaland no longer applies

Watts: has been held that a partners and senior employees of a company cannot work for two competing businesses at same time

i.e. as this is automatic breach of fiduciary duty

Scottish Co-Operative Wholesale v Meyer [1959]

Thus why should situation of directors be any different?

  1. Board Authorisation

  • Section 175(4): prior board authorisation will prevent there being a breach.

  • Thus can only be given prior to breach of duty.

  • Section 175(5): authorisation may be given in a:

  1. Private company, provided there is nothing in constitution invalidating such consent (permissive)

  2. Public company, provided there is a provision in constitution authorising directors to consent (restrictive)

    NB this is the only means by which board authorisation can be given

    Under old common law, mere renunciation of an opportunity might have sufficed (without necessarily authorising D to take it himself)

    Queensland Mines v Hudson [1970]

    However must now be case that taking up of opportunity by D is actively approved

Full and frank disclosure

For valid authorisation, director’s disclosure to others must be “full and frank”

merely saying “may I remind you that I have an interest” does not suffice

Gray [1952]

...

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