Final Revision Director's Duties

Front 1

Percival v Wright

Back 1

Mr Percival through his solicitors inquired from the company if any body was willing to purchase their shares £12.55 a priced based on independent valuation. Mr Wright who was the chairman of a company, with two other directors, agreed to buy shares from Mr Percival at £12.10 each. Mr Percival then found out the directors had been negotiating with another person for the sale of the whole company at far more than £12.10 a share. The directors had not told Percival. Percival claimed breach of fiduciary duty.Court held the directors owed duties to the company and not shareholders individually.There is no question of unfair dealing in this case. The directors did not approach the shareholders with the view of obtaining their shares. The shareholders approached the directors, and named the price at which they were desirous of selling. The plaintiffs’ case wholly fails, and must be dismissed with costs.

Front 2

Allan v Hyatt

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Courts have been able to distinguish Percival v Wright on its facts and have held that fiduciary duties, carrying a duty of disclosure, can be owed to shareholders. For example, when recommending whether a takeover should be accepted it has been held that directors owe a duty to the shareholders, which includes a duty to be honest and not to mislead.The directors induced the shareholders to give them options for the purchase of their shares so that the directors could negotiate for the sale of the shares to another company. Instead of selling directly, they took the option to purchase the shares themselves and then resold to the other company.It was held that the directors made themselves agents of the shareholders in the sale of shares and must therefore account to them for profit they have made on the sale. They had to make full disclosure as they had become agents to shareholders.

Front 3

Re A Company 1986

Back 3

When there are rival takeover bids, it has been held that the directors must not exercise their powers to prevent the members obtaining the best price for their shares.Chairman of a company had asserted in a misleading letter that the lower of the two rival takeover bids for the company should be accepted because the other could not succeed.

Front 4

Re Chez Nico (Restaurants) Ltd

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Percival v Wright to be very doubtful authority for the proposition that directors of a company may purchase shares in a company without disclosing pending negotiations for the sale of the company's undertakings, and that in special circumstances directors may owe a fiduciary duty of disclosure to the shareholders. The court refused to follow Percival v Wright and commented that the standard of conduct required from a director in relation to dealings with shareholders will differ depending on the surrounding circumstances and the nature of the responsibility which in a real and practical sense the director has assumed toward the shareholder.

Following factors may have some influence:-1. Dependence by shareholders upon the directors for information and advice2. Existence of a relationship of confidence3. Significance of some particular transaction for the parties4. The extent of any positive action taken by or on behalf of the directors to promote the transaction

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West Mercia Safetywear v Dodd

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Where a company is insolvent or of doubtful solvency or on the verge of insolvency and it is the creditors' money which is at risk the directors, when carrying out their duty to the company, must consider the interests of the creditors as paramount and take those into account when exercising their discretion.

Front 6

Winkworth v Edward Baron Developments

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directors owe a fiduciary duty to the company and its creditors, present and future, to ensure that its affairs are properly administered and to keep the company’s ‘property inviolate and available for the repayment of its debts’.

Front 7

Re Smith & Fawcett

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Directors must exercise their discretion bona fide in what they consider – not what a court may consider – is in the interests of the company, and not for any collateral purpose.

(good faith, 172) and (not for collateral, 171)

4 Stage Test:

1. consider on fair view the nature and limits of power

2. why was it delegated to directors

3. what was the substantial purpose of its exercise? Whether proper or not? Give credit to bona fide thinking.. May take objective approach (how critical or substantial an alleged requirement may have been)

4. Reach to conclusion and give judgement.

Front 8

Extrasure v Scattergood

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Transferred company's funds to parent company to pay off debts... conflict of good faith and PPD (proper purpose doctorine).

Uisng 4 part test of Re Smith & fawcett, transfer was found improper.

Front 9

Hogg v Cramphorn

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It was held that the new shares issued by the directors are invalid. The directors violated their duties as directors by issuing shares for the purpose of preventing the takeover. The power to issue shares creates a fiduciary duty and must only be exercised in order to raise capital and not for any other purposes such as to prevent a takeover. The act could not be justified on the basis that the directors honestly believed that it would be in the best interest of the company. The improper issuance of shares can only be made valid if the decision is ratified by the shareholders at a general meeting, with no votes allowed to the newly issued shares.

Front 10

Howard Smith Ltd v Ampol Petroleum

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It is unconstitutional for directors to use their fiduciary powers to issue shares in the company purely for the purpose of destroying an existing majority, or creating a new majority which did not previously exist. To do so is to interfere with the element in the company's constitution which is separate from and set against their powers.

Front 11

Bamford v Bamford

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Mixed motive decision... determine principal motive.. if improper.. exercise of power invalid.

Front 12

Mills v Mills

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Upheld resolution to distribute bonus shares even though it consolidated majority voting power of MD... no ulterior or illegitimate intention found.

Front 13

Regencrest v Cohen

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the question is whether the director honestly believed that his actions or omission was in the interests of the company.

Therefore, an act done in the unreasonable belief that it was in the interests of the company is not in breach of fiduciary duty, provided the belief was held honestly.

Front 14

Item Software v Fassihi

Back 14

If director acts without considering the interest of the company there are no basis of his action carried out in good faith, he will be in breach of his fiduciary duty.

Front 15

Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald

Back 15

Facts:The sole director awarded himself €100000 as a redundancy payment and this decision was made at a general meeting where this person and the company's secretary were only present.Held:There was no reasonable ground for the belief that the director had acted in the best interests of the company.

Front 16

Colin Gwyer v London Wharf

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Provided directors act in good faith and not willfully blind to firm's interests... they'll not be liable for breach of their fiduciary duty (but will be liable for breach of duty of care).

Front 17

Fulham Football Club v Cabra

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The directors of a company had entered into an undertaking to support and refrain from opposing planning applications by another party for the development of certain land in return for the receipt by the company of large sums of money. The directors subsequently wanted to give evidence to a planning inquiry opposing the development and sought a declaration that they were not bound by the undertakings and were entitled to give such evidence to the inquiry as they considered to be in the interests of the company. The court of Appeal disagreed. It held that they had not improperly fettered their discretion.In both this case and in Thorby v Goldberg, directors had exercised their independent judgment at the time the agreements were entered into. The cases were not those of fettering discretion but of exercising it at a certain time and in a certain way.

The court drew a distinction between directors fettering their discretion(which is prohibited) and acting in a way which restricts their future discretion(which is permissible).The directors had exercised their independent judgments at the time they gave the promise not to oppose the planning application and hence it was not a case of fettering their discretion but rather a case that they had already exercised it.

Front 18

Thorby v Goldberg

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The court held that the proper time to exercise discretion was the time the agreement was entered into and provided they had considered the interests of the company at that time, the agreement was valid.

Front 19

Donoghue v Stevenson

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Existence of general duty of care based upon reasonable foresight.

Front 20

Re Cardiff savings Bank

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Director elected when months old and in 39 years attended just one meeting.

"Intermittent theory" of directors.. must exercise care at meetings they attend however not at all bound to attend any meeting whatsoever.

Front 21

Re city Equitable Fire

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(1.) A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience.(2.) A director is not bound to give continuous attention to the affairs of his company. His duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board upon which he happens to be placed. He is not, however, bound to attend all such meetings, though he ought to attend whenever, in the circumstances, he is reasonably able to do so.3.) In respect of all duties that, having regard to the exigencies of business, and the articles of association, may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly.

Front 22

Re D'Jan of London

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Held director negligent liable to company for losses caused as a result of its insurers repudiating fore policy for nondisclosure. Director had signed the inaccurate form without first reading it.

Front 23

Norman v Theodore

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Appropriate test stated in s214 of Insolvency Act which defines negligent conduct for the purpose of "wrongful trading".

s174 (2) CA, 2006 adopts Norman v Theodore position and mirrors s214 Insolvency Act's wrongful trading provision.

1. objective test – what is required of the reasonable director carrying out the particular functions that they’re responsible for

2.subjective test – whether, judged by the experience, skill and knowledge that the individual director has, they’ve fallen below a certain standard in their conduct If the director has a higher standard of knowledge, experience and skill than that expected under the first part of the test then they will be judged on whether they have reached the standard expected in the second part of the test. For example, a director who has a long period of service will be expected to perform to a higher standard than a newly-appointed director.

Front 24

Re Barings plc

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Held that the three directors should be disqualified. Unfitness was determined by the objective standard that should ordinarily be expected of people fit to be directors of companies. Directors must inform themselves of company affairs and join in with other directors to supervise those affairs. Having no adequate system of monitoring was therefore a breach of this standard. Directors may delegate functions, but they nevertheless remain responsible for those functions being carried. Furthermore, the degree of a director's remuneration will be a relevant factor in determining the degree of responsibility with which a director must reckon

Front 25

Chan v Zacharia

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Fudiciary in breach must account for any profit/ gain which was obtained under conflict.

Front 26

Boardman v Phipps

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Must be real possibility of conflict, not some "imagined situation"

Court has the power to grant equitable allowance to the fiduciary if it is thought that the justice between the parties so demands. (Restricting in cases where it may lead to encouraging other trustees/directors in any way to put themselves in a position where there interests conflict with their duties as trustees/directors.)

Front 27

Regal (Hastings) v Gulliver

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Directors are liable to account for activities outside the company if (i) what the directors did was so related to the affairs of the company that it can properly be said to have been done in the course of their management and in utilisation of their opportunities and special knowledge as directors and (ii) what they did resulted in profit for themselves. (Lord Russell of Killowen) ‘The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well intentioned, cannot escape the risk of being called upon to account.’

Directors of Regal invested their own money to buy the subsidiary company shares and then they sold the whole group in a take over bid and then got an instant profit from the acquired shares of a subsidiary company. Later, court declared this act a clear breach from their fiduciary director's duties.

Front 28

Cook v Deeks

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Held: Deeks and Hinds were guilty of a breach of duty in the course they took to secure the contract, and were to be regarded as holding it for the benefit of the Toronto Construction Company: “while entrusted with the conduct of the affairs of the company they deliberately designed to exclude, and used their influence and position to exclude, the company whose interest it was their first duty to protect.” This led to the legal conclusion that: “men who assume the complete control of a company’s business must remember that they are not at liberty to sacrifice the interests which they are bound to protect, and, while ostensibly acting for the company, divert in their own favour business which should properly belong to the company they represent.”

Front 29

IDC v Cooley

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Mr Cooley was an architect employed as managing director of Industrial Development Consultants Ltd., part of IDC Group Ltd. The Eastern Gas Board had a lucrative project pending, to design a depot in Letchworth. Mr. Cooley was told that the gas board did not want to contract with a firm, but directly with him. Mr. Cooley then told the board of IDC Group that he was unwell and requested he be allowed to resign from his job on early notice. They acquiesced and accepted his resignation. He then undertook the Letchworth design work for the gas board on his own account. Industrial Development Consultants found out and sued him for breach of his duty of loyalty.Court held that even though there was no chance of IDC getting the contract, if they had been told they would not have released him. So he was held accountable for the benefits he received. He rejected the argument that because he made it clear in his discussions with the Gas Board that he was speaking in a private capacity, Mr. Cooley was under no fiduciary duty. He had ‘one capacity and one capacity only in which he was carrying on business at that time. That capacity was as managing director of the plaintiffs.’ All information which came to him should have been passed on.

Front 30

Peso Mines v Cropper

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Ratio: The Court may find that a bargain made as a personal matter does not give rise to the corporate opportunities doctrine.The decision of the board as to whether that offer should be accepted or rejected. At that point he stood in a fiduciary relationship to the appellant. There are affirmative findings of fact that he and his co-directors acted in good faith, solely in the interests of the appellant and with sound business reasons in rejecting the offer. There is no suggestion in the evidence that the offer to [Cropper] was accompanied by any confidential information unavailable to any prospective purchaser or that [Cropper] as director had access to any such information by reason of his office. When, later, [Dr. A] approached the appellant it was not in his capacity as a director of the appellant, but as an individual member of the public whom [Dr. A] was seeking to interest as a co-adventurer.”

Front 31

Queensland Mines Ltd v Hudson

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Held: The Privy Council held that Hudson was not liable to account because QML’s rejection of the opportunity to develop to mines took the venture outside the scope of the fiduciary relationship and because Hudson had acted with full knowledge of the directors of the company, who must be taken to have consented to his activities.

Front 32

Balston v Fitters

Back 32

Intention to setup rival firm after leaving/resigning not regarded as conflict. (in conflict only if he does so while a director)

Front 33

Dranez v Hyek

Back 33

Directors not required to disclose intention of setting up a rival firm after leaving company.

Can utilize confidential information/;know-how' learned/acquired when director. examples: databases, customer lists, supplier arrangements, sales strategy, etc.

Front 34

Bristol & West BS v Mothew

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Multiple DirectorshipsNothing wrong for holding more than one directorship, even with a company engaged in direct competition... But the director will owe a duty to each of the Companies he holds directorships with..."He (the director) must serve each as faithfully and loyally as if he were his only principal."

Front 35

Aberdeen Railway Co v Blaikie Brothers

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Held: Aberdeen was not bound by the contract. The key points were that it "may sometimes happen that the terms on which a trustee has dealt or attempted to deal with the estate or interest of those for whom he is a trustee, have been as good as could have been obtained from any other person - they may even at the time have been better. But still so inflexible is the rule that no inquiry on that subject is permitted. The English authorities on this head are numerous and uniform." Mr Blaikie’s ‘personal interest would lead him to an entirely opposite direction, would induce him to fix the price as high as possible. This is the very evil against which the rule in question is directed,