Effect of Companies Act 2006 on Director Conflict of Interest

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Introduction…………………………………………………………………….…..……2

i. Conflict of Interest under Sc 175 ………………………………………..………….2

ii. Scope of Corporate Opportunity ……………………………………………………3

iii. Regal Hastings: strict approach …………….…………………………..…………4

vi. Boardman: no-conflict rule …………………………………………………………7

v. Liberal Approach ……………………………………………………………………10

vi. Bhullar v Bhullar: business line test ………………………………………………14

vii. Avoiding Conflict of Interest …………………………………………………….. 17

a. Sc 175 (4)(a) ………………………………………………………………….18

b. Sc 175(4)(b): Authorization …………………………………………………19 

Conclusion………………………………………………………………………………22

Bibliography…………………………………………………………………………….24

 

Introduction

It is well recognized that company has a separate legal personality[1]. However a company is not a legal person per say, therefore it is unable to manage its business or assets[2]. Hence the role of a director is important to act on behalf of the company in managing its interests and affairs. Thus, there is a fear of abuse of power seemingly directors are given an extensive power. As such, the current Companies Act 2006 (CA) has codified directors’ duties and this includes the duty to avoid conflict of interest[3], which is the pivotal focus of this essay. 

This assessment will starts with a brief introduction of conflict of interest, which is codified under Sc 175 of the Companies Act 2006. The duty to avoid exploitation of corporate opportunity is provided under Sc 175(2). However it does not define the scope of opportunity. Thus the next part of the essay will refer to the common law approach, particularly the influence of the no-profit and no conflict rules which has defined and characterized corporate opportunity. In doing so, it is evident that the directors are not freely to pursue opportunity, however the strict common law approach has been relaxed under Sc 175(4) which will be discussed at the end of the essay.

 

i. Conflict of Interest under Sc 175

One of the main reforms of the Companies Act 2006 was the codification of directors’ duties. Through the proposal from the Law Commission and Company Law Steering Group, the legislators had replaced the common law system so that directors have a clear view of their duties, which they owed to the company[4]. An important regulation was Sc 175, which illustrates a general duty of directors to avoid conflict of interest. The applicability of this duty is taken in a broader context where director must avoid situation that may be conflicted directly or indirectly with their interest[5]. However not all conflict of interest would fall under this provision. For instance, a benefit that was conferred by a third party would be covered under Sc 176[6].

As mention earlier, the duty under Sc 175 is fiduciary in nature where the director shares a trustee-beneficiary relationship with the company. As echoed by Lord Cranworth that ‘it is a rule of universal application’[7]that trustees should not enter into contracts where their personal interests conflict with those ‘he is bound to protect[8]. This equitable rule requires the fiduciary to avoid any conflict of his interest against his principal. In essence, a director is assumed to have a sense of loyalty to the company especially since he is entrusted to manage the company’s asset. Schaller provides an insight that it is better to link this relationship with agency law, as it is a matter of the agent owing the principal a fiduciary duty of undivided loyalty[9]. This is due considering the fact that the directors are designated to act solely in all matters that is connected to the company therefore they are strictly refrains from competing against the company[10].

ii. Scope of Corporate Opportunity

In addition to the ‘no-conflict’ rule[11], Sc 175(2) sets out the ‘no-profit’ rule. This provision exemplifies the common law corporate opportunity doctrine and prohibits the act of exploitation by the director[12], It should be noted that this prohibition is not only limited to ‘property, information or opportunity’, but to cover other economically feasible interest to the company.

The ‘no profit’ rule in Sc 175(2) has by large under the influence of the strict view adopted by the English common law. Now, neither Sc 175(2) nor the common law has provided the definition of corporate opportunity. Instead the scope of corporate opportunity is closely linked with the rules of fiduciary duty. Generally it was decided in Keech thattrustee could not renewed the property for the benefits of himself[13]. The significant of such has acted as an analogy for directors. Therefore, a director cannot act upon the corporate opportunity in light of his fiduciary capacity in the company. This is because directors must act in the best interest of the company[14] and not to ‘enter into engagements in which he has or can have a personal interest conflicting or which possibly may conflict with interests of those whom he is bound to protect’[15]. A classic example can be seen in the case of Regal (Hastings) Ltd v Gulliver where the court had perceived a strict view to circumscribe corporate opportunity and held that the directors had ‘material conflicts of interest and duty’[16].

iii. Regal Hastings: Strict Approach

 

By way of background, the directors of Regal Ltd set up another subsidiary company, Amalgamated to acquire the other two cinemas in Hastings. However the landowner insisted that a personal guarantee of the rent and the paid up capital in Amalgamated to be increased. As Regal Ltd could only find £2,000 of the total sum, each of the directors in Amalgamated, solicitor and other investor decided to apply for 500 shares each. Subsequently the parties then sold the shares in Amalgamated to the purchasers at a profit and Regal Ltd under the control of the new purchasers pursued a claim for the recovery of sum made by the directors and solicitor for the profits made upon the opportunity. It was argued that profits made should be returned to the company as there was a conflict of personal and company interest seemingly formers directors had used their position to gain the shares.

What immediately distinguished corporate opportunity in Regal Hastings is the position of director in discharging his duty. It was explained by Lord Macmillan that the acquisition of the cinema was an opportunity because it was related to ‘the affairs of the company’[17]. Accordingly, the directors had ‘in the course of their management…with special knowledge as directors’[18] had created the opportunity to finance the acquisition. The court has viewed the shares of Amalgamated were acquired simply because of their knowledge and position as directors for Regal Ltd. Thus such profits obtained from the exploitation of the opportunity are prohibited.

The reasoning in Regal Hastings emphasized that directors must act in the best interest of the company. Thus the essence of the ‘no profits’ rule derives thereon and states that directors are not entitled to exploit the corporate opportunity, which ‘resulted in a profit to themselves[19]. Simply this means that scope of corporate opportunity overlaps with the fiduciary duty of the director; hence in this context, the profits attained would be an emblem of a disloyalty of the fiduciary.

As consequences, Regal Hastings was described as ‘draconian[20] because it does not offers flexibility in business decision. Firstly, the opportunity to acquire the shares in Amalgamated has been offered to the company. However, it was the company itself who declined the offer, as it was unable to gather more funds. Therefore, as a matter of fact, if a bone fide decision has been made by the company not to pursue the opportunity, then by all means the directors should not be accountable for the profits they have eventually made[21]. This reasoning formed the basis of the ‘no profits’ rule that is describe as strict and inflexible as it limits the scope for the director to take the opportunity. This is because the House of Lords did not deliberate on whether the company itself could have the potential to exploit the opportunity. It was commented that the court was fixated on the opportunity that arises from the position of the director[22] that it has failed to consider from the position of the directors who has acted in good faith. A comparison drawn with Cook v Deeks whereby three directors of the railway company had set up another new company with intention to divert the opportunity of the construction contract away from the primary company[23]. Contrasting this here, the directors in Regal had acted in good faith and took an extra risk to develop the project when the company was unable to do so. The company would have incurred further loss if the directors had not exploited the opportunity. It seems that liability was simply attached to them because of their position in the company. This lead Keay to comment that the English position has suggested that the fiduciary duty is all encompassing and consuming because the director has ‘no commercial life outside of the company’[24].

Nevertheless, the House of Lords agreed that it is a misapprehension to question on the position of the director who has been acting bone fide.[25]. Instead the correct preposition was whether the director has been profiting from his position in the company. As put it in words by Lord Russell of Killowen that the rule of equity ‘in no way depends on fraud, or absence of bona fides[26]’.Hence the court has made it clear that motives of the director are irrelevant to circumscribe corporate opportunity. In deciding so, an objective test was adopted to evaluate whether corporate opportunity falls within the fiduciary from the viewpoint of the director having the knowledge. The court was clearly driven with the idea that it is important to uplift the nature of fiduciary loyalty whereby the principal will not be left in the vulnerable position. Especially since the fact that company cannot own opportunities, directors will be at their liberties to fully utilize the opportunity for their own advantages which would lead them to neglect their duty to act in the best interest of the company. Therefore such strict approach to determine the scope of corporate opportunity is necessary to cover situation where a company is unable to act on its own to protect its assets. Thus it is safe to assume that law on the ‘no profit’ rule is reasonable as it act as a regulatory mechanism[27] where the directors are aware and reminded not to take advantage of the opportunity due to the company’s inaccessibility. For instance, in an attempt to prevent the directors from any personal opportunity such as selling or buying of shares, Sky Plc has formed a new special committee to ensure that the board is free from any conflicts of interest in dealing with confidential information during the take over bid by 21st Century Fox[28].

iv. Boardman: no-conflict rule

 

The application in Regal Hastings on the ‘no-profit’ rule has ‘figured so prominently’[29] in deciding the scope of corporate opportunity. So much so, its essence when encountering opportunity has been extended in Boardman[30]. In this case, Boardman the acting solicitor, has obtained useful information and proceeded to exploit the opportunity by capitalizing the assets of the company and in return attained some profits for him as well as the directors. However one of the directors alleged a conflict of interest thus proceeded to sue their profits.

The issue here was whether Boardman is liable for the personal profits deriving from the information. Going back to Regal, the opportunity in question was only available during the directorship. However information could -as echoed by Lord Upjohn falls ‘outside the scope of agency’[31] because it can be freely accessible even to the public and not necessary confined to the directors in office. Nevertheless, the majority of the House of Lords in Boardman ensued to treat the acquired information in the similar manner as company’s property. In lieu with that, Boardman has acquired the confidential information whilst he was acting on behalf of the trustees. Thus the profit earned flowing from the opportunity was during his capacity as fiduciary, an eminent conflict of interest.

In this instance, it seems that the majority judges had disregarded the fiduciary was acting bone fide on behalf of the trust. In Boardman, the profits deriving from the opportunity do not exemplify the conduct of disloyalty. It has been commented that there ought to be a line drawn between the duty to avoid conflict of interest and the role of fiduciary because not all disloyalty colludes with dishonestly[32]. For instance the exploitation of opportunity in Boardman has allowed the company to gain profits. Similarly in Muradwhere it was held that Al-Saraj has to be accounted for all profits attained from the opportunity due to his failure of disclosing information despite the Murad sisters have received profits[33]. It appears that the law has disregarded the causal link between fiduciary and the profits especially when the directors have not fraudulently exploited the opportunity but the court has insisted to impose a strict duty on the directors regardless of their honesty[34]. Thus, this prompted the Court of Appeal in Murad to comment ‘it may be that the time has come when the court should revisit the operation of the inflexible rule of equity in harsh circumstances’[35].

 

Subsequently the decision in Boardman has also illustrated that, in addition to the ‘no-profit’ rule, there is another ‘no-conflict’ rule in defining corporate opportunity. This led to the question of whether both the rules are applied co-existingly or separately. Interestingly, Lord Uptown the dissenting judge has argued that the court was too keen to apply the strict approach in Regal without deciding on merit of the case. Kershaw have commented that the ‘no-profit’ and ‘no-conflict’ rule should be a separate and independent set of rules. However the decision by the majority in Boardman has illusions that the no-profits operate as parameter of the ‘no-conflcit’ rule which subsequently determine the rule itself[36]. In doing so, it has epitomized the strict nature of the ‘no-conflict’ rule[37] because the English courts were enthusiastic to attach the duty of fiduciary of loyalty to director thus considered the ‘no-profit’ rules as part of the ‘no-conflict’ rules. For instance it is difficult to consider Boardman to have a fiduciary duty to the company, as he was just a solicitor, but the point where he obtained the profits from the information would out rightly placed him in conflict of interest. Thus it was opinioned that the no-profit rule is an instantiating rule of the no-conflict rule[38].

 

Subsequent cases have been influence by the decision in Regal/Boardman. In Industrial Development Consultants v. Cooley the pertaining issue was whether the director could be accountable for the profits even if the company could not have obtained the opportunity[39]. The court held that the director was in breach of his duty even though the contract was offered due to the director’s expertise[40]. Lord Roskill referred that the information on the opportunity was of concern and relevant to the company thus director has the liability before accepting the contract[41]. By this reason, there was a connecting link between the profit and fiduciary as the information on the opportunity was given whilst he was still employed as the director in the company.

v. Liberal Approach

As opposed to the strict approach in Regal, some cases have resorted in pragmatism to evaluate corporate opportunity. Despite Regal has made much influence in the UK law, nevertheless attempts have been made to narrow down the scope on what constitutes corporate opportunity.

One of the main reasons for the departure was because the strict rule in Regal was stringent in the modern business context. There is a need to identify that not all opportunity are known to the directors due to their position in the company. Opportunity could also derive subsequent to the directors’ expertise and experience. Likewise in Peso Silver Mines, the company has been approached with an opportunity to acquire the land but it was rejected, as the company cannot restrain its resources any further[42]. The issue here was whether can director seized the opportunity after the company’s rejection.

This case has referred to principles held in Regal where the Canadian Supreme Court has to consider the director’s liability. The distinction was, the owner of the land then approached and offered the sale of the land to one of the directors of the company who then set up a new company to acquire it. Ultimately the control of the company changed and the new directors proceeded to sue the now dismissed director for the profits made from exploiting the opportunity. Interestingly the court held that the director was not in breach of his duty despite the director had acted upon the opportunity as per Regal[43]. This is because there were evidence that there were many offer made to the company previously, thus the court was convinced that the directors had acted in good faith and for the best interest of the company to decline the opportunity. And after the rejection, it appears that the director was not in his fiduciary position but in his private capacity when the opportunity was offered again.

It was put forward that such conclusion was necessary especially because ‘the complexity of modem business, modern practice and the modern way of life, the strict rule laid down in the Regal and other cases should not be applied’[44]as not all opportunity belong to the company. The liberal approach has refined the scope of corporate opportunity and this was credited to be a ‘desirable development’[45]because it recognized that exploitation of opportunity might not necessary give rise to conflict of interest. For instance in the Australian case of Green v Bestobell Industries[46] that though the manager was held to be breach conflict of interest but the profits he gained from the opportunity has no connection with his fiduciary position as the news of the tender was made to the public at large.

Therefore it appears that the scope of corporate opportunity as defined in Regal is vague as it has exemplifies that any opportunity belongs to the company in equity[47]. The English court has vigorously involve the duty of fiduciary with the application of the no-profit rule even if it does not relates to the exploitation of corporate opportunity. This puts the UK law at odds with the position in United States whereby corporate opportunity is only confined if it falls within the company’s business line[48]. Kershaw has commented that the US approach is more flexible than English Law as it allocate ‘greater proportion of potential opportunity[49] for the directors because this test will relates if the opportunity can be utilized by the company such as if the company’s financial state ability to consider if such opportunity belongs to it. Take for instance in Guth v Loft, profits made from the opportunity byGuth was accountable Loft Inc as the company’s capital and facilities was used to acquired of Pepsi[50]. It was clear that the director has misused their position to further their personal interest. The US approach has provided an extension to distinguish corporate opportunity to a more realistic and judicial certainty[51] because it relates and considers the opportunity that was pursued by the directors is actively or intimately connected with the company’s existing or current activities. Hence many have ‘welcome and realistic position for the English Law to adopt’[52].

Conversely it is a matter of policy grounds to adopt a liberal approach especially in the context of director resigning from his position. The rule in Regal has been extended to director who has resigned from his position. As provided in the case of CMS Dolphin Ltd whereby the company has successfully claimed for the profits deriving from the opportunity made by the director prior to his resignation. It was held that there must be ‘some relevant connection or link between the resignation and the obtaining of the business’[53]. In this case here, the director has dishonestly transferred the opportunity away from the company prior to the resignation. Thus the profits made were accountable to the company.

However the English court has taken the liberal approach in situation where the director has been forced to resign by the company. This can be seen in the case of IEF where the director has gained profits from the contract after his resignation from the company[54]. Hutchison J opinioned that the director has resigned due to the dissatisfaction with the company and not prompted to acquire the opportunity. Furthermore the company was not actively seeking from the orders. His Lordship has highlighted that  ‘directors alone, because of the fiduciary nature of their relationship with the company, were restrained from exploiting after they had ceased to be such any opportunity of which they had acquired knowledge while directors’[55]. It is highlighted that it was against public policy to hold them from exploiting opportunity deriving from their knowledge and expertise. Thus it was held that the director is permitted to keep the profit. Furthermore the strict rule is irrational to continuously bind the director even when he has resigned from his position and accept his employment elsewhere. Take for instance, every opportunity received by Eric Schmidt, CEO of Goggle cannot be regarded as conflict of interest is due to his previous affiliation as one of the board members in Apple. It could be perhaps due to his experiences in managing the mobile phone production which is a small industry [56].

 

Despite above, the preposition for maintaining the strict rule in Regal has its advantages as well. In contrast, the liberal nature of the rule has neglect the duty of loyalty imprint in directors. This lead Beck to criticize the liberal approached has placed the law on fiduciary as ‘inadequate to deal with the corporate context’[57]. Put simply, the significant of the liberal approach shows that director is allowed to accept opportunity which is valuable to him personally but detrimental to the company. Flannigan for instead has stressed that the absence of adhering the strict rule would be  ‘technically or delectably disadvantageous’[58]because less degree of protection is offer to the trust and this would attribute to misconduct such as misuse of position. Likewise this could be seen in the commercial reality where Olympus has overpaid its advisor, Axes Americas in the acquisition of Gyrus Group Ltd. The refusal by Olympus to reveal the identity of the owners of Axes Americas has probe and hint that the directors of Olympus has been obtaining personal benefits deriving from the acquisition opportunity[59]. As clarified by Valsan that the central reason for strictness of the test is to prevent the self-interest from interfering with the director’s duty to act in the best interest of the company[60]. Therefore the decision in Regal is prudent as it provides certainty because it explains that the issue is not about the directors acting in good faith but touches upon fiduciary loyalty duty.

 

vi. Bhullar v Bhullar: business line test

Aside from the above, the court in Bhullar v Bhullar[61] has explored and redefined the ‘no-conflict’ rule held in Boardman. The facts involve a family company – Bhullar Bros Ltd, whose relationship had broken down and prompted both the brothers and their sons to negotiate to split the company assets. In the aftermath, the defendants chanced upon the sale of property and acquire it through their very own company, Silvercrest. Thus the issue is whether directors were liable for acquiring the property[62].

In lieu with Boardman decision, the court at first instance held that the defendants were in breach of their duty due to the nature of the no-conflict rule lies in the fiduciary position[63]. In other words, the defendants in Bhullar would be accountable to the fiduciary position disregarding the fact that the information of the property was obtained in their private capacity.

However, the Court of Appeal took the otherwise direction and examine on the issue of whether the director could acquire the opportunity pending to a negotiation. Their Lordships referred to dissenting judgment of Lord Upjohn in Boardman[64] who remarked that conflict could be avoided if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest’ [65]. This test dictates that a potential conflict arises if the opportunity is within the scope of business of the company and it does not depend on the ‘maturing business opportunity’[66] but on the idea of a reasonable man determining through the facts the case if there was a real possibility of conflict. Hence, it would not depend on the assumption to treat all opportunity as belonging to the company to determine the conflict. In this instance, it was viewed that the property would have been valuable to increase the Company’s commercial value thus the opportunity would falls within it’s existing business line. Moreover as the defendants were still ‘carrying on business namely as the director of the company… in that capacity they were in a fiduciary relationship with the company’[67], there was a real sensible possibility of conflict when the directors have converted the opportunity to themselves.

The judgment in Bhullar was said to embrace the American approach of the ‘line of business test’[68]. Gower for instance has observed that this is a notable decision because the Court of Appeal has supported the scope of business test in identifying the corporate opportunity[69]. This test empowered that an opportunity if embraced ‘fundamental knowledge, practical experience and ability to pursue, which, logically and naturally, is adaptable to its business … it may be properly said that the opportunity is in line of the corporation’s business’[70]. Therefore so long as there is commercial value to the company, the director cannot pursue the opportunity.

Despite the above,in O’Donnell v Shanahan, the Court of Appeal took the otherwise approach[71]. In short, the salient facts involve a claim against the former directors for acquiring a property, which might have been purchased by the company. The court at first instance found that there was no possibility of conflict because the company’s business was providing financial and advisory services, thus property investment would not have fallen within its business line[72]. The Court of Appeal has furthered that the scope of business is only confined to partnership because its agreement could determine the scope of the partnership’s business and the fiduciary duties. Hence the test adopted in Aas v Benham should be departed[73]. Instead, it was viewed that the opportunity to acquire the property was known to the director during their capacity as directors of the company. Thus the no profit rule was applicable based on the facts, and the directors had triggered the no conflict rule when they have acted upon the opportunity. As such, the lower court’s decision was reversed.

Based on the decision in O’Donnell, it is evident that the Court of Appeal declined to refer to test of business line for the scope of corporate opportunity[74]. It was commented the test is difficult to determine the company’s business line and it would further defer the directors from gaining the opportunity[75]. Referring to the approach in Bhullar, it does not form flexibility in determining the scope of opportunity[76] but in fact it was a ‘stricter version of the line of business test’[77]. This is because the defendants in Bhullar were a mere passer-by when they come across the opportunity[78]. Furthermore the opportunity to purchase the land was not presented to the company. The company was neither interested nor pursuing the property especially since the directors have decided to part ways thus the company has no legitimate interest with the opportunity[79]. The business line test has compelled to limit the self-interest of the director by considering all opportunity as commercially attractive to preclude from the director from exploiting it. It would not make sense as now opportunity are not only confined to the company’s current business line but to encompass what it would be interested in the future. As such this is a grey area that was left unresolved as opposed to the certainty in the strict approach.

vii. Avoiding Conflict of Interest

 

Given the nature of the law, it is clear that director will be caught under Sc 175 if he had appropriated any opportunity. The basic preposition in Regal/Boardman has been reaffirm under Sc 175(2) where it states that it is immaterial whether the company could take advantage of the property, information or opportunity’. Going back to the assessment, director cannot escape Sc 175 by virtue that a fiduciary is required to serve his master with good faith and fidelity’[80]. This formulation was argued by Worthington as ‘an orthodox fashion’ [81] as the CA has not provided basic guideline of whether the opportunity is rightfully belonging to the company.

Nevertheless, the harsh effects of the rules are mitigated with the introduction of Sc 175(4). It is not within the essay to discussed on how to escape liability but the only way the director could exploit the opportunity if the situation cannot be regarded to give rise to a conflict[82] or alternatively the matter has been given authorization by the company[83].

(a) Sc 175 (4)(a)

 

Firstly, Sc 175 (4)(a) requires the element of reasonableness to decide whether there is conflict[84]. Generally it provides an alternate answer to Sc 175(2) whereby if the director could usurp opportunity in their private capacity. This provision has used the similar phrase used by Lord Upjohn thus it has been suggested that this provision has referred to the scope of business test[85]. It appears that the law has codified both the majority and dissenting decision in Boardman where Sc 172(2) embraces the duty to avoid conflict and Sc 175(4)(a) provides situation that is unlikely to consider a conflict of interest[86]. Thus Sc 712(4)(a) is an ideal struck of balance between the strict and flexible rule because the court could adopt a broad or a wide view in defining opportunity as whether it fall within the business line[87].

However the lack of clarity begs the question of whether under Sc 175 (4)(a) would applies after the company’s unbiased rejection. Brenda viewed that Sc 175 (4)(a) was negatively expressed because it fails to clarify what circumstances that would qualifies under this provision[88]. Indeed only certain situation allows one to reasonably decide if there is a rise of conflict. For instance if the company’s articles of association has provides an exemption clauses to address situation of conflict of interest[89]. Brudney and Clark had commented that the element of impossibility in the test would ultimately lead to ‘an inevitable results will be to permit the diversion’[90]. This is especially so when the court needs to ascertain company’s line of business, which is wide and could stretched to the future scope of the business.

Alternatively Lim has suggested that directors could exploit the opportunity from the time of the company’s rejection. He illustrated this point with the reference to Peso case and argued that the reason why the court was convinced that there is no exploitation because the company has formally authorized the rejection and the interested directors had only took up the opportunity in a reasonable time after the company’s rejection[91]. By virtue of this, it can be suggested that a director must mitigate all consideration such as whether the company has given actual authorization where one would perceive to be reasonable possibility of conflict before taking the opportunity[92]. However it is unclear whether Lim’s suggestion can be a mere speculation as there are no current attempts and authorities to clarify Sc 175 (4)(a).

(b) Sc 175(4)(b): Authorization

 

Moving on to Sc 175(4)(b), one could pursue the corporate opportunity if he has obtained the board authorization. Contrasting this with Sc 175(4)(a) where the issue of clarity has yet to be attempted in UK[93], Sc 175(4)(b) embodies the common law approach for company approval that there is no breach of conflict of duty. Thus it has been commented that Sc 175(4)(b) is arguably the better exception[94] as it provides certainty to act as an effective the defense mechanism to avoid conflict of interest.

Prior to CA, the importance of gaining authorization was explained in Bhullar that ‘the existence of the opportunity was information which it was relevant for the company to know, and it follows that the appellants were under a duty to communicate to the company’[95]. The common law has implied that the failure to inform the company about the opportunity is a breach of duty. As explained by Armour that the rule of conflict interest does not concern on returning the profits to its entitlement but rather it encourage the responsibility of disclosure[96]. In light of this the preposition for authorization under Sc 175(4)(b) impose that the director is under a duty to disclose his conduct to the company. Such was the position in Fassihi, where the Court of Appeal held that the managing director was under a positive duty to disclose the benefits deriving from the opportunity[97]. The failure to disclose would amounts to a conflict of interest.

Under this provision directors could avoid conflict of interest by gaining authorization from the board[98]. It is highlighted that it is a loose term to attach the director for a duty to disclose the interest[99]. This is true as the purpose of disclosure is not for the director to relief himself from the liability, but to prevent the abuse of trust vested upon them. Thus maintaining the ‘integrity of trusting relationship’ is the source of obligation[100]. Likewise the claim on conflict of interest against Theo Paphitis was dropped because the boards were fully aware and given the authorization before he could engage on the opportunity in purchasing La Senza[101].

It is highlighted that the concept of authorization works differently for private and public company. In the case of private company, the article of association could either permit or refused to grant authorization[102]. If it is former, the director could gain authorization of the conflicted matter[103].

As for public company, Sc 175(6) provides that a simple majority is required to authorize the conflict matter. Firstly, its article of association must expressly allow the directors to access to the opportunity[104]. The next phrase involving the voting procedure where interested directors are not allowed to vote on the conflicted matter[105]. It is caution that the meaning of ‘interested director’ is not provided; nevertheless it is safe to assume that it is referring to the director who is actively interested to purse the conflicted matter. Such was the approached in Regal whereby the court held that the authorization by the directors is not valid as it was the fiduciary themselves who have authorized the opportunity to acquired Amalgamated shares. This would act as a safeguard because there is a risk of gaining approval from the board. As highlighted by Gower that there is an underlying interest in a culture of easy conflict approval’[106]. There is a risk of collusion amongst the directors who happens to share a close relationship with the interested directors. This could seen in Enron where the board of directors have approved a number of proposals for its Chief Financial Officer to acquired the opportunity on behalf of the company and profited at the company’s expense[107]. This is to remind and alert the directors who are voting that they are subjected to a duty to act in the best interest of the company and personal benefits should be avoided[108].

Another issue arouse as to whether authorization from the shareholders are more appropriate. It was provided in Regal where the judges had referred to Lord Russell that acquiring votes from shareholders would constitute a valid authorization. Perhaps this is because the voting procedure would pose a limitation especially to a sole proprietor company. As seen in Goldtrail Travel Ltd v Aydin where the court held that the director is unable to acquire the opportunity by virtue of SC 175(6) as he is the sole proprietor of the said company[109]. Despite that it is unclear whether the common law position will be referred. Furthermore it was submitted by the Company Law Review Steering Group (CLRSG) that getting the authorization from the shareholders should be avoided as it is against the idea that the board of directors making decision for the company[110]. This was supported by Enriques and others who voiced that this can reduce cost of having a annual meeting which is also time consuming as the process involving the discussion would put the opportunity at the risk of lost[111].

Conclusion

Even with the codification of director’s duties under the CA, the common law approach will be largely influential in guiding the court to determine if there is a conflict of interest should the director acted upon the opportunity. Despite there are attempts to narrow down the interpretation of opportunity, nevertheless the codification of the CA has endorsed the strict approach taken in Regal/Boardman. Perhaps this is driven with the fear that director, as trustee would abuse their position for their personal interest. Thus the strict formulation is necessary ‘to maintain its vigour in the new setting.[112]

 

However it should be noted that the decision in Regal and Boardman were prompted by the fact where it was difficult to ascertain the intention of the directors. In this sense, the significant in Regal/Boardman cannot be justified in this modern context. Hence to mitigate this vigor, the CA has acknowledged that directors are allowed to act on the opportunity only if there is authorization. In doing so, it has clarified that a corporate opportunity is available to the directors.

Bibliography

 

Primary Resources:

 

Cases

Aberdeen Railway Co v Blaikie Brothers [1843-60] All ER Rep 249

Bhullar and others v Bhullar and another Re Bhullar Bros Ltd, [2003] EWCA Civ 424

Boardman and another v Phipps [1966] 3 All ER 721

Cook v Deeks [1916] I A.C. 554

CMS Dolphin Ltd v Simonet and another [2001] All ER 294

Canadian Aero Service Ltd v O’Malley (1973) 40 DLR (3d)

Fassihi v Item Software (UK) Ltd [2004] B.C.C. 994

Industrial Development Consultants v. Cooley [1972] 2 All ER 162

Island Export Finance Ltd v Umunna [1986] BCLC 460

Goldtrail Travel Ltd v Aydin and others [2014] EWHC 1587 (Ch)

 

Green v Bestobell Industries (1982) 1 ACLC 1

Guth v Loft Inc. 5 A2d 503 (Del Ch 1939)

Keech v Sanford (1726) 2 Eq Cas Abr 741

Kleanthous v Paphitis & Others, [2011] EWHC 2287 (Ch)

Murad and another v Al-Saraj and others [2005] EWCA Civ 959

New Zealand Netherlands Society ‘Oranje’ Inc v Kuys and another [1973] 2 ALL ER 1222

Peso-Silver Mines Ltd v Cropper (1965) 56 DLR (2d) 117

Robb v Green [1895] 2 Q.B. 315

 

Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378

Re Allied Business and Financial Consultants Ltd, O’Donnell v Shanahan [2009] EWCA Civ 751

Salomon v A . Salomon & Co Ltd [1897] AC 22

Legislation

Companies Act 2006

Secondary Resources:

 

Journals

Alotaibi M. S. A., ‘Regulating conflicts of interest in the post-CA 2006 era: Part 1: a triumph of disclosure over honesty and good faith’, 24 International Company & Commercial Law Review 1., 2013

Armour J., ‘Corporate Opportunities: if in Doubt, Disclose (But How)’, The Cambridge Law Journal, Vol.63(1), 2004,

Beck S. M., ‘The Saga of Peso Silver Mines: Corporate Opportunity Reconsidered’, 49 Canadian Bar Review 80 ,1971,

Conaglen M., ‘The Nature and Function of Fiduciary Loyalty’, Law Quarterly Review, Vol.121

Edmunds R. and Lowry J.,’The No Conflict-No Profit Rules and the Corporate Fiduciary:Challenging the Orthodoxy of Absolutism’, Journal of Business Law, 2000.

Hirt H. C., The law on corporate opportunities in the Court of Appeal: Re Bhullar Bros Ltd (United Kingdom), Journal of Business Law, 2005

Kraakman, R., and R. Squire, ‘Law and the Rises of the Firm’,119 Harvard Law Review, 2006.

Kershaw D., ‘Does it Matter how the Law Thinks About Corporate Opportunities’, Legal Studies ,2005.

Kershaw D., ‘Lost in Translation: Corporate Opportunities in Comparative Perspective’, Oxford Journal of Legal Studies, Vol.25(4), 2005

Lim E., Directors’ fiduciary duties: a new analytical framework, Law Quarterly Review, Vol.129, 2013,

Lee R., ‘Causation and account of profits for breach of fiduciary duty’, Singapore Journal of Legal Studies, 2006.

Flannigan R., The Fiduciary Obligation, Oxford Journal of Legal Studies, Vol 9, 1989.

Nolan R., “A Fiduciary Duty to Disclose?”, Law Quarterly Review, Vol.113,1997.

Prentice D.D. and Payne J., The corporate opportunity doctrine, Law Quarterly Review, Vol. 120, 2004.

Sing C. S., Avoidance of loss, Regal Hastings and the no conflict rule (United Kingdom), The Company Lawyer, Vol.34(3), 2013.

Scott S., ‘The Corporate Opportunity Doctrine and Impossibility Arguments’, Modern Law Review, Vol.66(6),November 2003.

Schaller, W. L., ‘Corporate Opportunities and Corporate Competition: A Comparative Discussion of Fiduciary Duties’, John Marshall Law Review, Vol. 46,2012.

Sullivan, G.R., ‘Going it Alone- Queensland Mines v Hudson’, Modern Law Review, Vol.42(6), 1979.

Simon W., Corporate opportunities law and the non-executive, Journal of Corporate Law Studies, 2016.

Victor B. and  Clark R. , ‘A New Look at Corporate Opportunities’,  Harvard Law Review, Vol.94(5), 1981.

Valsan R., ‘Fiduciary Duties, Conflict of Interest and proper Exercise of Judgment’, McGill Law Journal, Vol 62, 2016.

Worthington S., ‘Reforming Director’s Duties’, Modern Law Review, Vol.64(3), 2001.

Books

Davies, P.L., and S. Worthington, Gower: Principles of Modern Company Law,10th Edition, London, Sweet & Maxwell, 2016.

Enriques L., Hertig G., Kanda H., & Pargendler M., Related Party Transactions in R. Kraakman et al. (eds), The Anatomy of Corporate Law, Oxford, Oxford university press, 2017.

Girvin S., Frisby S. and Hudson A., Charlesworth’s Company Law, 18th Edition, London, Sweet and Maxwell, 2010.

Hannigan B., Company Law, 4th Edition, Oxford, Oxford University Press, 2016

Kershaw D., Company Law in Context: Text and Material, 2nd Edition, Oxford, Oxford University Press, 2012.

Keay A., Directors’ Duties, Bristol , Jordan Publishing, 2nd Edition, 2014.

Nolan R., Regal (Hastings) Ltd v Gulliver (1942), Oxford, Hart Publishing Limited, 2012.

P.L.Davies and Worthington S., Gower: Principles of Modern Company Law,10th Edition, London, Sweet & Maxwell, 2016

Worthington S., Sealy & Worthington’s: Text, Cases, & Materials in Company Law, 11th Edition, Oxford, Oxford University Press, 2016,

Online Articles

Arthur C., ‘Google CEO Eric Schmidt resigns from Apple board over ‘conflicts of interest’, The Guardian, 3rd August 2009, https://www.theguardian.com/technology/2009/aug/03/google-chief-schmidt-resigns-apple-board

Brennan K., ‘Sky: 21st Century Fox Takeover Bid’, House of Commons Hansard, Vol 618, 12th December 2016, https://hansard.parliament.uk/commons/2016-12-12/debates/7C16B788-DFFE-4E03-A851-BE3CE9801EE7/Sky21StCenturyFoxTakeoverBid

Fuse T., ‘Exclusive: Olympus scandal tied to banker who shuffled losses’, Reuters, 8th November 2011, http://www.reuters.com/article/us-olympus-nakagawa-idUSTRE7A70HU20111108

The Role of the Board of Directors in Enron’s Collapse’, U.S Government Printing Office, Washington, 8th July 2002, https://www.gpo.gov/fdsys/pkg/CPRT-107SPRT80393/pdf/CPRT-107SPRT80393.pdf

 

Penty R., 21st Century Fox Bid for Sky values UK Company at  $31b, The Sydney Morning Herald, 10th December 2016, http://www.smh.com.au/business/markets/fox-bid-for-sky-values-uk-company-at-31b-20161209-gt86h0.html,

 


[1] Salomon v A . Salomon & Co Ltd [1897] AC 22.

[2] R. Kraakman and R. Squire, ‘Law and the Rises of the Firm’, Harvard Law Review, no. 119, 2006, p. 1333.

[3] Sc 175 Companies Act 2006

[4] Modern Company law for a Competitive Economy: Final Report, London, DTI, 2001, p. 40-41.

[5] Sc 175 (1) Companies Act 2006

[6] Sc176 Companies Act 2006

[7] Aberdeen Railway Co v Blaikie Brothers [1843-60] All ER Rep 249, at p.252

[8] Ibid

[9] W. L. Schaller, ‘Corporate Opportunities and Corporate Competition: A Comparative Discussion of Fiduciary Duties’, John Marshall Law Review, Vol. 46,2012, p. 7

[10] Ibid.

[11] Sc 175 (1) Companies Act 2006

[12] Sc 175 (2) Companies Act 2006

[13] Keech v Sanford (1726) 2 Eq Cas Abr 741, Sel Cas Ch 61

[14] Sc 172 Companies Act 2006

[15] Aberdeen Rail Co v Blaikie Brothers All ER Rep 249, p. 252 as per Lord Cranworth LC

[16] R. Nolan, Regal (Hastings) Ltd v Gulliver (1942), Oxford, Hart Publishing Limited, 2012, p. 499

[17] [1942] 1 All ER 378, p. 391 as per Lord MacMillan

[18] Ibid, as per Lord MacMillan

[19] Ibid, as per Lord MacMillan

[20] G.R. Sullivan, ‘Going it Alone- Queensland Mines v Hudson’, Modern Law Review, Vol.42(6), 1979, p. 711

[21] [1942] 1 All ER 378, p. 395 as per Lord Greene in Court of Appeal

[22] R. Edmunds and  J. Lowry,’The No Conflict-No Profit Rules and the Corporate Fiduciary:Challenging the Orthodoxy of Absolutism’, Journal of Business Law, 2000, p.132

[23] Cook v Deeks [1916] I A.C. 554

[24] A. Keay, Directors’ Duties, Bristol, Jordan Publishing, 2nd Edition, 2014,  p. 333

[25] [1942] 1 All ER 378, p.386 as per Lord Russell of Killowen

[26] Ibid.

[27] M. Conaglen, ‘The Nature and Function of Fiduciary Loyalty’, Law Quarterly Review, Vol.121, 2005, p. 46

[28] R. Penty, ‘21st Century Fox Bid for Sky values UK Company at  $31b’, The Sydney Morning Herald, 10th December 2016, http://www.smh.com.au/business/markets/fox-bid-for-sky-values-uk-company-at-31b-20161209-gt86h0.html, K. Brennan, ‘Sky: 21st Century Fox Takeover Bid’, House of Commons Hansard, Vol 618, 12th December 2016, https://hansard.parliament.uk/commons/2016-12-12/debates/7C16B788-DFFE-4E03-A851-BE3CE9801EE7/Sky21StCenturyFoxTakeoverBid

[29] Nolan, op. cit, p. 499

[30] Boardman and another v Phipps [1966] 3 All ER 721

[31] [1966] 3 All ER 721, p. 726, as per Lord Upjohn

[32] S. Worthington, Sealy & Worthington’s: Text, Cases, & Materials in Company Law, 11th Edition, Oxford, Oxford University Press, 2016, p. 432.

[33] Murad and another v Al-Saraj and others [2005] EWCA Civ 959

[34] R. Lee, ‘Causation and account of profits for breach of fiduciary duty’, Singapore Journal of Legal Studies, 2006, p. 492.

[35] Murad and another v Al-Saraj and others [2005] EWCA Civ 959, para 82, as per Lady Justice Arden

[36] D.Kershaw, ‘Does it Matter how the Law Thinks About Corporate Opportunities’, Legal Studies ,2005, pp. 533-558.

[37] New Zealand Netherlands Society ‘Oranje’ Inc v Kuys and another [1973] 2 ALL ER 1222, p.1225, as per Lord Wilberforce

[38] D.Kershaw, ‘Lost in Translation: Corporate Opportunities in Comparative Perspective’, Oxford Journal of Legal Studies, Vol.25(4), 2005, p. 607

[39] [1972] 2 All ER 162

[40] Ibid

[41] [1972] 2 All ER 162, pg 172.

[42] Peso-Silver Mines Ltd v Cropper (1965) 56 DLR (2d) 117

[43] Ibid.

[44] Ibid, p. 139, as per Noris J.A.

[45] P.L.Davies and S. Worthington, Gower: Principles of Modern Company Law,10th Edition, London, Sweet & Maxwell, 2016, p. 808

[46] (1982) 1 ACLC 1

[47] Cook v Deeks [1916] I A.C. 554

[48] Guth v Loft Inc. 5 A2d 503 (Del Ch 1939)

[49] Kershaw, op. cit, p. 609

[50] Guth v Loft Inc. 5 A2d 503 (Del Ch 1939)

[51] S. Scott, ‘The Corporate Opportunity Doctrine and Impossibility Arguments’, Modern Law Review, Vol.66(6),November 2003, p. 853

[52] Lowry and Edmunds, op. cit, p.125.

[53] CMS Dolphin Ltd v Simonet and another [2001] All ER 294.

[54] Island Export Finance Ltd v Umunna [1986] BCLC 460

[55] Ibid, p. 482

[56] C. Arthur, ‘Google CEO Eric Schmidt resigns from Apple board over ‘conflicts of interest’, The Guardian, 3rd August 2009, https://www.theguardian.com/technology/2009/aug/03/google-chief-schmidt-resigns-apple-board

[57] S. M. Beck, ‘The Saga of Peso Silver Mines: Corporate Opportunity Reconsidered’, 49 Canadian Bar Review 80 ,1971, p. 101

[58] R. Flannigan, The Fiduciary Obligation, Oxford Journal of Legal Studies, Vol 9, 1989, p. 295

[59] T. Fuse, ‘Exclusive: Olympus scandal tied to banker who shuffled losses’, Reuters, 8th November 2011, http://www.reuters.com/article/us-olympus-nakagawa-idUSTRE7A70HU20111108

[60] R. Valsan, ‘Fiduciary Duties, Conflict of Interest and proper Exercise of Judgment’, McGill Law Journal, Vol 62, 2016, p.4,

[61] Bhullar and others v Bhullar and another Re Bhullar Bros Ltd [2003] EWCA Civ 424

[62] Ibid.

[63] Ibid.

[64] [1966] 3 All ER 721, p. 756

[65] Phipps v. Boardman [1966] 3 All ER 721 p.756 as per Lord UpJohn; Bhullar and others v Bhullar and another Re Bhullar Bros Ltd, [2003] EWCA Civ 424, para 30, as per Lord Justice Jonathan Parker

[66] Aberdeen Ry Co v Blaikie Brothers ([1843-60] All ER Rep at p 252, as per Lord Cranworth LC; Bhullar and others v Bhullar and another Re Bhullar Bros Ltd, [2003] EWCA Civ 424, para 17, as per Lord Justice Jonathan Parker

[67] [2003] 2 BCLC 241, para 41

[68] D.D. Prentice and J. Payne, The corporate opportunity doctrine, Law Quarterly Review, Vol. 120, 2004, pp.198-202

[69] Davies & Worthington, op.cit, p. 808

[70] Guth v Loft Inc 5 A.2d 503, 514 (Del. 1939)

[71] Re Allied Business and Financial Consultants Ltd, O’Donnell v Shanahan [2009] EWCA Civ 751

[72] Ibid

[73] Ibid, para 68.

[74] Ibid.

[75] D. Kershaw, Company Law in Context: Text and Material, 2nd Edition, Oxford, Oxford University Press, 2012, p 559.

[76] C. S. Sing, Avoidance of loss, Regal Hastings and the no conflict rule (United Kingdom), The Company Lawyer, Vol.34(3), 2013, pg 74.

[77] Prentice and Payne, op.cit, pg 198

[78] Bhullar and others v Bhullar and another Re Bhullar Bros Ltd, [2003] EWCA Civ 424

[79] H. C. Hirt, The law on corporate opportunities in the Court of Appeal: Re Bhullar Bros Ltd (United Kingdom), Journal of Business Law, 2005, pg 671.

[80] Robb v Green [1895] 2 Q.B. 315,at 320, as per A.L. Smith L.J.

[81] S. Worthington, ‘Reforming Director’s Duties’, Modern Law Review, Vol.64(3), 2001, p. 452

[82] Sc 175(4) (a) Companies Act 2006

[83] Sc 175(4) (b) Companies Act 2006

[84] B. Hannigan, Company Law, 4th Edition, Oxford, Oxford University Press, 2016, p. 263

[85] E. Lim , Directors’ fiduciary duties: a new analytical framework, Law Quarterly Review, 2013, Vol.129, p. 250

[86] D.Kershaw, Company Law in Context: Text and Material, 2nd Edition, Oxford, Oxford University Press, 2012, p. 572.

[87] W. Simon, Corporate opportunities law and the non-executive, Journal of Corporate Law Studies, 2016, p.159

[88] Hannigan, op. cit., p. 263

[89] Worthington, op.cit., p. 395

[90] B. Victor and  R. Clark , ‘A New Look at Corporate Opportunities’,  Harvard Law Review, Vol.94(5), 1981, p. 1021.

[91] Lim, op. cit., p. 249

[92] Ibid.

[93] Worthington, op.cit., p. 395

[94]  M. S. A. Alotaibi, ‘Regulating conflicts of interest in the post-CA 2006 era: Part 1: a triumph of disclosure over honesty and good faith’, 24 International Company & Commercial Law Review 1., 2013, pg 1

[95][2003] EWCA Civ 424, para 41

[96] J. Armour, ‘Corporate Opportunities: if in Doubt, Disclose (But How)’, The Cambridge Law Journal, Vol.63(1),  2004, p. 35

[97] Fassihi v Item Software (UK) Ltd [2004] B.C.C. 994

[98] Sc 175 (6) Company Axt 2006

[99] R. Nolan, “A Fiduciary Duty to Disclose?”, Law Quarterly Review, Vol.113,1997,

[100] R. Flannigan, .The Fiduciary Obligation’, Oxford Journal of Legal Studies, Vol 9, 1989, p. 320

[101] Kleanthous v Paphitis & Others, [2011] EWHC 2287 (Ch)

[102] Sc 175(5) (a) Companies Act 2006

[103] S. Girvin, S. Frisby and A. Hudson, Charlesworth’s Company Law, 18th Edition, London, Sweet and Maxwell, 2010, p. 345

[104] sc 175(5)(b) Companies Act 2006

[105] SC 175 (6) (a) & (b) Companies Act 2006

[106] Davies and Worthington, op. cit. p. 816

[107] ‘The Role of the Board of Directors in Enron’s Collapse’, U.S Government Printing Office, Washington, 8th July 2002, https://www.gpo.gov/fdsys/pkg/CPRT-107SPRT80393/pdf/CPRT-107SPRT80393.pdf

[108]  Sc 172 Companies Act 2006

[109] Goldtrail Travel Ltd v Aydin and others [2014] EWHC 1587 (Ch)

[110] Company Law Review, Modern Company Law for a Competitive Economy: Final Report (London,

HMSO, 2001), para 3.23.

[111] L. Enriques, G. Hertig, H, Kanda, & M. Pargendler, Related Party Transactions in R. Kraakman et al. (eds), The Anatomy of Corporate Law, Oxford, Oxford university press, 2017, p. 159.

[112] Canadian Aero Service Ltd v O’Malley (1973) 40 DLR (3d) 371, p.383

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