Corporate Opportunitie

Corporate opportunities are opportunities that arise as a result of a director’s position or opportunities that are relevant to the company’s business. The taking up of corporate opportunities by directors is governed at general law principally by the duty to avoid profits (the profits rule) but also by the duty to avoid conflicts (the conflicts rule), as well as by statutory duties and corporate governance principles. This chapter first outlines the general law position given that it subsists in a number of jurisdictions and that the interpretation of the statutory duties in the Companies Act 2006 (UK) is guided by this jurisprudence. The chapter then provides detailed examination of the relevant statutory duties and includes comments on relevant corporate governance principles.

Directors’ Conflicts

The issue of directors’ accountability and responsibility is never far from the public spotlight, as recently highlighted by corporate governance reforms initiated by the UK government and by the proceedings of the Banking Royal Commission in Australia. A topic of increasing practical and regulatory complexity is the conflicts faced by company directors. Conflicts may occur between directors’ self-interest and the interests of the company, between duties owed to more than one company or principal or between the interests of different stakeholders. This is a core source of concern, and of commentary, in a number of common law jurisdictions. As the complexity of commercial transactions and of corporate life in general increases, the application of the duty to avoid conflicts has necessarily become more complicated. At the same time there is a constant tension between ensuring accountability and not deterring responsible risk-taking. Concerns have been expressed that the legal and regulatory burden is too high. Providing certainty and comprehensive coverage of key aspects of the law relating to directors’ conflicts is therefore vital.

Conflicts and Profits

This chapter provides comprehensive analysis of the duties to avoid conflicts and profits (the conflicts and profits rules) and their statutory equivalents. The parameters of the term ‘conflicts’ are explored, including conflicts of interest and conflicts of duty. Debate surrounds whether ‘real sensible possibility’ of conflict is sufficient to give rise to a breach of the conflicts rule or whether proof of ‘actual’ 76 conflict or ‘pursuit’ of a conflict is necessary. The duty to avoid unauthorized profits is also discussed given that, in many cases, this duty also pertains to conflicts. The interrelationship between the duties to avoid conflicts and profits is critically analysed and comprehensive commentary on statutory iterations is provided. It is suggested that the key requirement, which also operates as a ‘rule of thumb’ and underlying principle, is that directors act in good faith in what they consider to be the interests of the company, thus exercising independent judgment. In this sense, the requirements imposed by corporate governance regimes essentially protect the ability of, and require, directors to act in good faith in the interests of the company. The final part of the chapter outlines the law concerning directors’ fiduciary duties to individual shareholders.

Conflicts of Duties

A key facet of the duty to avoid conflicts (the conflicts rule) is the avoidance of unauthorized conflicting duties. This principle applies where a director or other fiduciary faces a conflict between inconsistent duties. In the corporate setting this generally occurs when one person is on the board of two companies with different interests. It could, however, also occur where a director is a partner or a legal or other adviser to the company and thus owes multiple sets of duties. Sections 175(7) and 176(5) of the Companies Act 2006 (UK) specifically include such conflicts. This chapter critically analyses regulation of conflict of duties, as well as relevant statutory provisions.

AUTHORIZATION

At general law breach of the duties to avoid conflicts and profits (the conflicts and profits rules), as fiduciary duties, can be excused or authorized by the company as beneficiary of the duty. This can be done by approval of the company’s shareholders (usually in general meeting) or by provision in the company’s constitution (allowing disclosure to, and authorization by, the other directors). There are, however, limits placed on such authorization or ratification. The first part of this chapter discusses these limitations. It then discusses relevant statutory provisions in each of the jurisdictions, with a key focus on sections 175, 180, 239, and 232 of the Companies Act 2006 (UK). This includes more detailed discussion of the authorization provisions in sections 175(5) and (6), which are notably absent from section 176. The complex issue of ratification of breach of statutory duty in Australia is also canvassed. This limitation, which does not apply in the UK, renders a number of aspects of directors’ duties problematic. This includes attempts by companies to adopt more stakeholder-friendly approaches.

The Role of Other Duties

The general law duties to avoid conflicts and profits (the conflicts and profits rules) do not regulate all of the conflicts encountered by a director. In particular, where the conflict or profit involves the interests of a third party (such as a director’s spouse or family member, a creditor, a friend or a major shareholder), the duties to avoid conflicts and profits do not necessarily apply. Instead, the duties to act in good faith in the interests of the company and for proper purposes (the best interests and proper purposes rules) are engaged. It is also the duty to act in good faith in the interests of the company that regulates the conflicts faced by directors in relation to stakeholders. This chapter examines the law concerning conflicts involving third parties and the vexed topic of the interaction between directors’ duties and stakeholder interests. Stakeholders include employees, creditors, investors, suppliers, customers, local, national and global communities, and the environment as a whole. The importance of stakeholder interests (and particularly those of employees) and engagement with stakeholders has been emphasised in recent corporate governance reforms in the UK.

Related Party Regimes and Other Specific Statutory Regimes

This chapter gives an overview of specific statutory regimes that require shareholder approval where directors are conflicted. These include related party provisions, as well as detailed regimes governing directors’ service contracts, substantial property transactions, loans and quasi-loans, credit transactions and related arrangements, and payments for loss of office. Each of these provisions is, in a sense, a more specific enunciation of the broader prohibition on conflicts. These regimes apply to situations in which corporate history has shown that a requirement of board approval was insufficient to combat inherent conflicts, undermining directors’ accountability. Shareholder approval is now therefore required. Securities regulators in each jurisdiction impose additional requirements (such as disclosure) to ensure transparency and fairness. Given that related party regimes deserve a book in their own right this chapter is necessarily an overview. It outlines the UK position and key features of the regimes in Australia and Hong Kong for comparison.

Consequences of Breach

This chapter provides an outline of the consequences of breach of the duties discussed in this book and, in particular, of the duty to avoid conflicts (the conflicts rule) at general law and under statute. This includes discussion of third party liability based on the rule in Barnes v Addy, which may be very valuable in certain circumstances. It highlights the available remedies, as well as issues arising in the framing and application of the remedies. It also draws attention to the role played by the unfair prejudice (or oppression) remedy in relation to directors’ conflicts. Given that this remedy is favoured by shareholders, and that a number of unfair prejudice cases concern directors’ conflicts, it is important to outline its contours. Indirect enforcement, and any significant differences in enforcement mechanisms between the jurisdictions, will be considered. The chapter does not provide a comprehensive outline in relation to all remedies or the detail of every aspect of the remedies discussed. There is, at times, clear divergence between the application of certain remedies in different jurisdictions—a complete and comprehensive comparative critical analysis of remedies would fill an entire book on its own.

Theory and Rationale

This chapter critically examines the theoretical underpinnings of fiduciary law and of company law, presenting the rationale of conflicts regulation within that landscape. This is important given the changing terrain of fiduciary law. The duties to avoid conflicts and profits (the conflicts and profits rules) are a central feature of fiduciary law—indeed many scholars argue that these are now the only properly recognized (or ‘peculiarly’ fiduciary) duties. The chapter includes discussion of the concept of fiduciary loyalty and the practical importance of fiduciary classification. It examines the policy rationales for the duties.

Multiple Directorships (Including Competing Directorships)

The duty to avoid conflicting duties presents key challenges for individuals who hold multiple directorships. The issue of multiple directorships is fraught with uncertainty due to the fact that such directorships are not prohibited but can nevertheless give rise to complex conflicts issues. This is particularly the case concerning competing directorships, which have generated significant judicial attention. The conflicts involved in these positions are manifold—directors who serve on multiple boards face issues concerning protection of confidential information, serving the interests of each of the companies, and devoting adequate time to each company. These issues are exacerbated in the case of competing and interlocking directorships.