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Directors' Duties 2 Notes

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

1. Section 175 - no-conflict rule

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

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

3. Section 177 - self-dealing rule

1. Applies where director is entering transaction with company

SECTION 175

1. 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.

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

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

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

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

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

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

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

1. Thus is breach even if:

1. company would not have actually made use of the opportunity

1. Bhullar v Bhullar [2003]

2. company had already declined the chance to take up offer

1. Boardman v Phipps [1967]
Directors Who Resign

1. Is not breach of duty to:

1. merely plan to compete with company whilst still a director

1. Balston Headline Filters [1987]

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

1. Foster [2007]

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

3. Property of former company may be either: i) Existing work of former company (e.g. clients, contracts) ii) Maturing business opportunity

1. i.e. developing opportunity which D encountered in capacity as director, and which was thus property of company iii) or information/trade secrets of former company
- Foster v Bryant [2007]

2. There must be some sort of 'link' between resignation and taking up of the business

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

2. Foster v Bryant [2007]

Relevant Factors

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

1. Ripeness of opportunity

2. How long after resignation D takes up opportunity

3. Circumstances of termination of D's directorship
- Foster v Bryant [2007]

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

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

2. Foster v Bryant [2007]
Duties of Disclosure

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

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

2. Shepherd Investments Ltd [2006]

3. Though contradicted in Framlington [1987]

7. Duty probably falls under s.172 by analogy with Item Software [2004]
Limits Duty has become smaller

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

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

2. Plus Group v Pyke [2003]

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

1. Foster v Bryant [2007]
No possibility of conflict of interest

i) ii)

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

2. Thus unlikely to be breach where: Opportunity falls outside company's present range of business activities

1. e.g. company is not accustomed to pursuing such opportunities Company has decided not to pursue the opportunity

1. E.g. Queensland Mines v Hudson [1978]

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