Company Law 2009 ZA Q5 Directors Duties: s175 Duty to avoid conflict of interests.

s. P and F are directors of R Ltd and as such, owe fiduciary duties to the company (Percival v Wright applied) which includes the shareholders (Greenhalgh v Ardene Cinemas applied). These duties are set out and codified in s171 to s177 of the CA 2006 and it is stipulated in s170(4) that relevant case laws are still applicable to interpret the said provisions. On the facts of the question, the shareholders would like to know how to protect the interests of R Ltd with regards to: i. Ps competing directorship; and ii. F bringing his invention to a competitor. Such issues pertain to the fiduciary duty of loyalty wherein the director must do what he considers bona fide in the interest of the company, not for some collateral purpose (Re Smith & Fawcett referred). A director cannot seek to advance his own personal or some collateral purpose at the expense of the company. Lord Herschells formulation in Bray v Ford states that it is an inflexible rule of equity that a fiduciary is not allowed to put himself in a position where his interests and duty conflict. And in Bristol & West Building Society v Mothew, Millet LJ held that the principal is entitled to the single-minded loyalty of his beneficiary. Ps competing directorship. Being a director in another company as well is prima facie not a breach of fiduciary duty. Chitty J in London and Mashonaland Exploration Co held that a director does not breach his duties when he competes with his company, whether by directly engaging in a competing business or by holding a directorship in a competing company. This decision is considered authoritative and has stood for over a hundred years despite its obvious incongruence with the fiduciary duty to avoid conflict of interests. It is difficult to see how one may hold a competing directorship but at the same time must avoid a conflict between his duty to the company and his personal interests and/or his duty to a third party. Many have tried to resolve this by drawing a line between potential conflict and actual conflict; i.e. one would only be in breach if it was an actual conflict of interest.

However, modern courts have adopted a stricter stance in viewing competing directorships as giving rise to an irreconcilable conflict of interest and duty. Lord Denning in SCWS v Meyer held that such directors walk a very fine line indeed. Furthermore, the s175(7) provides that a conflict of interests also includes a conflict between interests and duty as well as a conflict of duties. Hence, holding competing directorships would likely be caught by this section. Following the above argument, the fact of holding a competing directorship, in a major competitor no less, would already put P in breach of his fiduciary duty of loyalty. In addition to that fact, we are told that P actively procured Fs innovative design for the benefit of the competitors company. There is, therefore, absolutely no doubt that P is in breach of this duty. In particular, P would be in breach of the so-called corporate opportunity doctrine whereby P would be in breach if he appropriates for his own benefit (or for someone else) an economic opportunity which is considered to belong rightly to the company which he serves. In Cook v Deeks the directors diverted for their own benefit certain contracts which were offered to the company. In Regal (Hastings) the directors only inadvertently profited from providing the necessary capital for the company to secure a lease. In both cases the directors were held liable for breach of fiduciary duty but in Regal (Hastings) it was held that the breach was capable of ratification because the directors had acted in good faith, whereas in Cook v Deeks it was not. The difference lies probably in the fact that the directors in Regal (Hastings) had acted in good faith. It is therefore submitted that Ps actions are not capable of ratification as clearly, on the facts, P clearly acted in bad faith. It also seems likely that he purposely rejected the idea, when F proposed it to the board, in order to appropriate the opportunity himself. He is, thus, liable to account for any profit he made out of Fs design. He may try and argue that he would not be liable since the company rejected the idea but s175(2) provides that it is immaterial that the company could not have taken advantage of the opportunity (IDC v Cooley applied). F bringing his idea to a competitor F may possibly be in breach of the duty to avoid conflicts of interest in s175 which states that a director must avoid a situation in which he has a direct/indirect interest that conflicts or may possibly conflict with the interest of the company. In particular, as discussed supra, he may possibly be in

breach of the corporate opportunity doctrine. In IDC v Cooley, a director who feigned illness and resigned to take up a corporate opportunity was found to be in breach of this duty despite the fact that it was not possible for the company to take up the opportunity itself. On the facts, even though the board rejected Fs idea, F would still be liable nonetheless. And the fact that F had acted bona fide in bringing his idea to the company first is also not likely to absolve him because it would seem that this duty subsists even after one has ceased to be a director of the company and even where he had acted in good faith (Regal (Hastings) applied). The rationale, as mentioned supra, is that the opportunity rightly belongs to the company even where it chooses not to exploit it especially if the director could not have come by the information/opportunity if not for his position as a director of the company. However, later cases have taken a different approach to the corporate opportunity doctrine in light of the unfairness of a strict interpretation. On post-resignation breaches, the case of Foster-Bryant v Bryant applied a more fact sensitive approach which takes into account factors, inter alia, like: The nature of the opportunity; i.e. its ripeness, specific-ness, and its relation to the director; The amount of knowledge the director possesses; The circumstances under which it was obtained; The time factor in the continuation of the fiduciary duty; i.e. from the termination of the fiduciary relationship to the time of breach; and Whether the director had been discharged or he had resigned.

Of relevance is the case of Peso Silver Mines where the board rejected, in good faith, an opportunity to buy some mining claims. It had doubted the validity of the claims and also was not in a conducive financial state to take risks. The companys geologist and formed a syndicate with the defendant and two other directors to work the claims and eventually made profit. The company, which had a new board, sued and claimed the profits on constructive trust. The court held the claim to be unsuccessful. It is submitted that such a decision is fairer because if the company rejects an opportunity brought by a director in good faith and with full disclosure, the latter should be allowed to exploit the opportunity since the company

has not been unduly prejudiced. Otherwise, all a company has to do is to reject every opportunity that comes along and wait for a director to pursue it and then sue if it turns out to be profitable. Such cannot be the position of the law. Thus, on the facts, F should not be liable to account for any profits he made from his innovation. Furthermore, it was a design which he came up with himself and which he arguably would have also invented even if he was not a director; i.e. it did not come by him because of his position as a director of the company (Foster Bryant applied). He also has been duly honest in announcing that he intended to leave the company in order to develop his new fabric. It is submitted that, therefore, he has discharged his duty under s175 to the company. The shareholders/directors of Runner Ltd should not be allowed make F liable to account for any profits he may have made but they may only bring an action against P. P will be liable to account for any profits he has made out of Fs design (Cook v Deeks applied).