1. The twin tracks of the common law: the no-conflict rule

First, the reasoning adopted in many of the cases is that which is applied to corporate conflicts of interest more generally, most classically stated (in the context of self-dealing transactions) by Lord Cranworth LC in Aberdeen Rail Co v Blaikie Brothers:

Self-evidently, applying the ‘no-conflicts' rule to corporate opportunity cases required the courts to decide what the interests of the company were, in order to establish whether the director had an interest (or owed a duty to a third party) that was in conflict with those interests. As described below, this was not always a straightforward exercise and they usually approached the task very cautiously.

But whatever the court's approach to the scope of the company's interests, it might be assumed that application of the no-conflicts rule does not require an assessment of how the director becomes aware of an opportunity; what matters is whether the company could take advantage of that opportunity, and therefore whether there is an actual or potential conflict. However, I will argue in Section D of this article that, in fact, the courts recognise that fiduciary duties have limits, that their scope is circumstance-specific, and that the circumstances in which the opportunity arises are important in determining whether there is a fiduciary duty to be navigated at all.

2. The twin tracks of the common law: the no-profit rule

A second way in which the courts approached these problems, often in the same judgments as they applied the (overlapping) no-conflicts rule, was to apply another rule applicable to fiduciaries, this one famously articulated in Keech v Sandford. In that case it was held that a trustee could not take a lease renewal for himself, even though its renewal for the benefit of the trust had been refused. Lord King LC said:

In contrast to the no-conflicts rule, this alternative approach did not require the courts to concern themselves with questions about the company's interests, but rather to decide whether the opportunity arose while the director was acting in a fiduciary capacity. Applying this logic, and putting the obvious evidential problems to one side, if a director had been approached independently, in her personal capacity, no profit would arise ‘by reason' of her directorship, and so there would be no liability to account if she took the opportunity for her personal benefit. On the other hand, it would imply that, if she was approached qua director, even if the company could not take advantage of the opportunity itself—and so no conflict arose between the director and the company—the courts would hold the director liable to account, in the same way as Lord King held the trustee liable to account in Keech v Sandford.

Whether these were two separate rules, or whether the ‘no-profits' rule is merely a specific application of the ‘no-conflicts' rule, was not clearly established by the cases and has been the subject of considerable academic discussion. However, the previous law is now only relevant in so far as it is preserved by the 2006 Act and, as we shall now see, the Act expressly adopts one of the rules and makes no mention of the other.

3. The Companies Act's rejection of the no-profits rule

It has often been observed that in adopting such a strict approach to corporate opportunities law, the UK courts made a clear policy decision that it was more important to err on the side of safeguarding ‘the integrity of the director's duty of loyalty' than to promote an ‘enterprise culture’, and a number of scholars have argued that it is time to reconsider the demarcation between those two objectives. To some extent at least, such a reconsideration was undertaken during the review process that ultimately led to the 2006 Act, and the most important innovation was a new approval mechanism designed to make it easier for conflicts of interest to be authorised. However, in the process of restating the law, other important changes were also made, and it is not entirely clear that these were fully understood by Parliament at the time. One such change was the apparent rejection (or, at least, subjugation) of the no-profits rule.

Section 175(1) of the 2006 Act, which both restated and modified the common law, provides as follows:

But that is not necessarily the end of the matter, because section 175 does not render the previous law redundant. On the contrary, section 170(4) tells us that the ‘corresponding' common law rules and equitable principles are relevant in interpreting and applying the directors' duties set out in the Act (and therefore for determining when a conflict arises). If the common law no-profits rule was an integral part of the no-conflicts rule, then we cannot entirely ignore pre-2006 Act cases that approached the corporate opportunities question through the no-profits lens, and we should consider whether, if an opportunity arises to a director by reason of her directorship, then there is automatically a legal conflict as a consequence of that fact. If, on the other hand, they were separate (albeit overlapping) rules, then we need to consider whether the 2006 Act has effectively abolished the no-profits rule, and we can now interpret the new law without reference to those judgments that applied it (even if, in some cases, it is hard to disentangle the two principles).

It is submitted that, even though Lord Upjohn in Boardman v Phipps regarded the no-profit rule as a sub-set of the no-conflicts rule, it seems clear that more recent judgments have not approached it in that way. They have generally treated the no-profit rule separately, in the sense that they have not regarded it as bounded by the question of whether there is any actual conflict, nor explicitly stated that the effect of the no-profit rule is to establish a deemed conflict upon which the no-conflict rule can bite. In Wilkinson v West Coast Capital and others, Warren J says:

It is true that the two rules stem from the same underlying principle: that directors should not be allowed to put themselves in positions of conflict; and they have the same underlying purpose: ‘to control the opportunism of those with limited access to the assets of others’. However, over time, the rules came to be articulated and applied separately by the courts. It became clear that the no-profits rule, at least as expressed in numerous cases, did not require an actual conflict, and was not therefore a sub-rule. Section 175, on the other hand, plainly does require there to be a ‘conflict', and it seems clear from the Act that the fact that the opportunity arose while a director was acting as such will not now be ‘the end of the point' as it was for Rimer LJ.

As one commentator says of the law, post implementation of the 2006 Act: ‘There is one rule, a no-conflict rule, and a prohibition on profiting when in a position of conflict.' On one level, it may be right to say that the no-profit rule has been 'subsumed' within section 174 (in the sense that this is the only relevant section to apply in corporate opportunities cases), but it is not clear, where there is a conflict on which section 175 can bite, what work there is left for the no profit rule to do; and if there is no such conflict, then it seems equally clear that there can be no breach of the rule. Given this, it would seem more accurate to say that the no-profit rule has been rendered redundant by the Act, and cases that dealt with that rule on a stand-alone basis, such that it was not constrained by the no-conflict rule, are likely to mislead as to the current state of the law. Section 170(4) does not require the courts to take that part of the common law into account, because that part of the common law does not ‘correspond' to an equivalent general duty under the Act.

In fact, the effective abolition of the ‘no-profit' rule as a matter of corporate law may make little practical difference, and it seems likely that Parliament was of the view that no meaningful change in law followed from its reformulation of the duty solely as a duty to avoid conflicts of interest. That is because, as pointed out by Davies and Worthington, the leading no-profit cases, including Regal (Hastings) itself, can be re-characterised as ‘no-conflict' cases. In Regal, the court is clearly sceptical about the directors' motives for investing in the subsidiary personally, especially as a sale was contemplated, and the board clearly did face a conflict of interest when deciding whether to raise money through the parent company or to invest it itself. Although the court assumed their bona fides, there is no suggestion that they did not face a conflict. Other commentators have pointed out that there is a significant overlap in coverage between the two rules, with one observing that in many cases ‘judicial language mixes the two rules simply because conflict and profit are both present’. In arguing that the 2006 Act effectively abolished the no-profit rule for directors, it should be pointed out that, in some significant cases since the Act came into force, the ‘no-profits' rule has been repeated or affirmed by the courts. For example, in Thermascan v Norman, a case about exploitation of a corporate opportunity after termination of a directorship, the parties agreed that section 175 did not change the pre-existing law, and the judge, David Donaldson QC, appeared to concur. However, the principles that were then enumerated—taken from a pre-2006 Act case, Foster Bryant Surveying Limited v Bryant —focused very much on conflicts of interest (or a conflict of interest and duty), and did not imply that a situation in which there was in fact no conflict would automatically give rise to a duty to account if the director became aware of an opportunity in the course of acting as a director. In fact, it was said that:

More significantly, in Sharma v Sharma, Jackson LJ summarised the duty under section 175 as follows:

4. The Companies Act's version of the no-conflicts rule

Even if, as argued above, the common law's application of the no-profits rule has limited relevance to directors since the 2006 Act, as a result of section 170(4), the common law clearly does remain relevant to the question of whether there is a conflict, at least to the extent not varied by section 175. And, as already noted, the courts have traditionally been very cautious when defining the company's interests for this purpose. First, they have taken the view that if the director herself could have any impact on whether the company was capable of taking advantage of the opportunity—for example, by persuading shareholders to lift a constitutional bar to the acquisition—then they will simply assume that the company does have an interest in the opportunity; in other words, they will regard capability facts as immaterial in determining whether there is a conflict. So, in Bhullar, the fact that the board, at the instigation of the claimants, had resolved not to undertake any new investments was not relevant. The board was not given the opportunity to reconsider this determination, and the court will not second guess what answer it would have given if it had been. The judgment in Bhullar closely follows the logic of Boardman v Phipps, in which the majority held that neither rejection of the opportunity by the trustees, nor the fact that it would have been necessary to apply to court in order to take advantage of the opportunity, were relevant in deciding whether Mr Boardman, solicitor to the trust, was conflicted in pursuing an opportunity for personal benefit.

There were, however, limits to this approach. For example, Warren J in Wilkinson v West Coast Capital, said that if the director who wanted to take advantage of the opportunity was also a shareholder who could (in that capacity) prevent the company from taking advantage of the opportunity, then it would not be a breach of duty for her to exploit it personally (although the judge does also say that there might be an obligation for directors to bring the opportunity to the attention of the board, even if discovered ‘other than in their capacities as directors'). It also seems that an absolute statutory prohibition on the company making the acquisition would be relevant in determining the scope of its interests. However, these limits are fairly extreme, and in a case in which a constitutional barrier to acquisition could be lifted by a shareholder vote—and the director, acting in a separate, non-fiduciary capacity, could not block such a shareholder decision—then the barrier to acquisition was not relevant at common law.

Section 175(2) confirms that strict approach, and may even cast doubt on the limited capability-type exceptions discussed in Wilkinson, saying that it is ‘immaterial whether the company could take advantage of the … opportunity’.

The other possible line of argument for a director who wants to pursue an opportunity personally might be that, as a commercial matter, the company would not be interested in it. In this regard, she might say that it was outside of the company's existing or anticipated sphere of activity.

The common law has not been entirely clear as to its position on this line of argument, although some support for it appears in the authorities, most recently in Wilkinson v West Coast Capital. In that case, obiter dictum of Warren J suggests that the qualification to the no-conflict rule first proposed by Lord Upjohn in Boardman v Phipps —that there must be a ‘real, sensible possibility' of conflict (and not just a theoretical one)—would mean that taking an opportunity in a completely different line of business would not render the director in breach of the duty to avoid conflicts. Given that the rule is predicated on the existence of a conflict, the principle of this approach is easy to understand. However, from a policy point of view, one can see why the court might be sceptical of dismissing the possibility of a conflict in cases where the company's current line of business is in an apparently unrelated area, for the same reason that they have been unwilling to dismiss conflicts in cases where the company is subject to a limitation that restricts its ability to take up the opportunity if that restriction is capable of being lifted by the board or the shareholders. The company's line of business is often in the control of the board and, even where it is not, the directors could ask shareholders to consider widening the current scope of the company's business interests if they believe that it would be in the company's commercial interests to pursue a particular investment opportunity.

In O'Donnell v Shanahan —looking through the no-profits lens—the Court of Appeal dismissed any business area limitations. However, as noted above, the Court treated the no-profits rule and the no-conflicts rules as entirely separate in this case, and its rejection of scope of business restrictions was specifically in the context of its application of the no-profits rule. As argued above, that rejection is no longer directly relevant. On the other hand, Rimer LJ's finding that there was also a breach of the no-conflicts rule was for a different reason: he did not appear to regard the taking of the opportunity as the relevant conflict, but rather the question as to whether the company should receive a commission (a question in relation to which the directors did have a clear conflict on the facts of the case). On that analysis, the pre-2006 Act law, which appeared to give room for arguments based on business line restrictions, remained, even after the decision in O'Donnell. However, it is not clear whether it has survived the Act's new formulation of the no-conflicts rule.

As to the position after the 2006 Act, it has been argued that a scope of business restriction, as was referred to in Wilkinson, could be preserved by section 175(4)(a) of the 2006 Act, which says that there is no breach of the no-conflicts rule if ‘the situation cannot reasonably be regarded as likely to give rise to a conflict of interest'. This phrase, similar to that used by Lord Upjohn in Boardman v Phipps and adopted in Wilkinson by Warren J, could be used by the courts to confirm (or re-establish) that the current legal position is that there are business-line restrictions on the no-conflicts rule, even if they continue to approach the definition of a company's scope of business cautiously, taking a broad view of which opportunities the company can be expected to want to pursue, or at least consider. However, this remains a matter of speculation, and it is perhaps unlikely that the courts will take up the opportunity that section 175(4)(a) offers them.

5. Application of the no-conflicts rule to multiple directorships

Many NEDs, perhaps even most, act as directors of more than one company, and indeed this may be regarded positively by the companies concerned, on the basis that it will broaden the experience and network of the NED. Most Articles do not ban NEDs from holding other directorships, and the fact that an NED (or even an executive director) is likely to have outside commitments, including other directorships, is acknowledged in many best practice codes. For example, the UK Corporate Governance Code says that a full-time executive director should not be permitted to take on ‘more than one non-executive directorship in a FTSE 100 company nor the chairmanship of such a company', while NEDs (including the chairman) are required to ensure that they have 'sufficient' time available, and required to disclose their ‘other significant commitments'. The Code's provisions are therefore focused more on the need for directors to have sufficient time available, rather than being concerned specifically with conflicts of interest.

Academic evidence of the impact of multiple directorships on corporate performance is unclear, but there are a number of studies that find a negative correlation between firm performance and the number of outside appointments of board members. Most recently, however, Christophe Volonté, in a study of 1,494 companies from the Swiss Performance Index from 2005 to 2012, found ‘no strong empirical evidence that  …  the number of outside activities [of directors] would affect firm value’.

In any event, these studies are generally concerned with the question of whether there is a link between ‘busy' boards and performance, using outside directorships as a proxy for ‘busy-ness', and (since outside commitments can come in many forms) are not focused on the effect of multiple directorships per se. And neither do these studies look at the impact of multiple directorships in smaller and unlisted companies. In short, it is not possible to draw any specific prescriptions for the law's attitude to multiple directorships from the academic evidence.

Nineteenth- and early-twentieth-century UK courts certainly had no problem with multiple directorships; indeed, the position famously taken by the court in London & Mashonaland Co Ltd v New Mashonaland Exploration Co Ltd, subsequently approved by the House of Lords, was that a director could even act as a director of two competing companies. This view was certainly controversial, and the Mashonaland principle has since been construed narrowly. Following Plus Group Ltd v Pyke, it would seem hard for an active director, even a non-executive, to be a director of two competing companies without specific authorisation.

But even after the decision in Plus Group, it had not been entirely clear where to draw the dividing line between a situation that is prohibited because the director is conflicted, and one where there is no legal bar to the dual (or multiple) directorships. That is because the courts were prepared to accept that something short of an actual conflict was enough for the law to intervene. As Sedley LJ put it:

As discussed extensively above, the Companies Act 2006 reformulated the general duty to avoid conflicts, while at the same time introducing new procedures to allow directors to authorise the conflicts of their fellow directors. During the Parliamentary Standing Committee debates about what is now section 175, there had been some disagreement as to whether this reformulation would make it more difficult for directors to take on multiple directorships, with some arguing that the clause would involve a significant change to the common law position, on the basis that any other directorship might well put the director in a position of potential conflict. However, the government insisted that the clause merely reflected the existing common law position; the Solicitor General said that that there was no problem with multiple directorships but that, if the fact of a second directorship gave rise to a foreseeable conflict of interest, it would need to be authorised by the directors or otherwise dealt with in accordance with the company's constitution, and the directors or the members would need to make an ‘informed decision' as to whether it should be permitted. There does seem to be more scope here for section 175(4)(a) to take on a role similar to that which is argued for it above in relation to corporate opportunities. While, in the face of a specific, profitable investment opportunity, it might be difficult for the courts to apply a clear business line restriction to say that no conflict arises, it may be easier for them to conclude that it is not likely that there will be circumstances in which a conflict will arise in future, if a director holds a position with two companies that have entirely different businesses (at least no more likely than if he is undertaking any other commercial activity outside of the company).

However, as Gower points out, this may leave a director in a difficult position: first, she will have to assess whether acceptance of a second directorship could ‘reasonably be regarded as likely to give rise to a conflict of interest’, and, if it does, she will need authorisation from the non-conflicted members of the board (or other authority from the company) before she can take it on. Then, if the situation changes and the possibility of a conflict becomes an actual conflict, or the facts otherwise change from those provided to the board initially, it seems likely that a further authorisation would be needed for the new 'situation' in which the director now finds herself. In practice, it may be likely that a director will want to get prior authorisation in any event, or at least to make full disclosure to the board, in case a conflict does later arise and it is argued that this was a foreseeable outcome.

1. Independent directors’ authorisation

Section 175(4)(b), in an important departure from the common law, provides that the duty to avoid conflicts of interests is not infringed if the matter has been authorised by the directors. Section 175(5) states that a private company needs no provision in its constitution to enable directors to authorise a conflict; they may do so unless the constitution says otherwise. Public companies, on the other hand, must include specific authority in their Articles.

Section 175(6) makes it clear that the director who has the conflict, and any other ‘interested' directors, may not be counted in the quorum for the directors' meeting, and any vote has to be passed by the disinterested directors alone.

This provision could be used to authorise a director to take an investment opportunity personally (or for the benefit of some other person), when to do so would otherwise have been a breach of section 175. However, there are several problems with this apparent solution. First, it seems likely that full information as to the nature of the actual or proposed conflict would have to be provided to the disinterested directors, and therefore that any authorisation could only cover such potential or actual conflicts as are known at the time the authorisation is given. This is not just because, as a practical matter, directors are unlikely to authorise a specific opportunity without being told what it is, but also because the courts might well invalidate any consent if it was not given on a fully informed basis. For example, in the case of Gwembe Valley Development Company Ltd and another v Koshy and others (where the courts were dealing with the common law requirement to make disclosure to shareholders in order to avoid a duty to account for an unauthorised profit), Mummery LJ said:

A somewhat similar situation was recently considered by the Court of Appeal in Sharma v Sharma, another case dealing with shareholder consent, in which Jackson LJ confirmed that, in order for a beneficiary's consent to be effective, the fiduciary must have disclosed all material facts. In that case, it was held that the director had discharged that obligation by making it plain that she would acquire some dental practices in her own name, even though not all of the details of any such purchases been identified at that point. Jackson LJ therefore confirmed that there were limits to the duty of full disclosure, but that sufficiently specific information had to be provided to allow an informed decision.

It therefore seems likely that, if no particular opportunities are in contemplation at the time of authorisation of a general conflict, a further, specific authorisation would be needed to authorise a specific situation, so that the directors could take into account the new information that was now relevant to their decision. That might be commercially unacceptable for a director, who would surely be concerned that an opportunistic board might seek to take the (future, as yet unknown) opportunity for itself by refusing the specific authorisation that is subsequently sought.

Second, in authorising a conflict, the directors must take account of the fact that they themselves owe duties to the company—most notably, perhaps, the duty to act in the way that they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole —and the disinterested directors might take the view that it is not for the benefit of the members as a whole to authorise a director to take a specific profitable opportunity that the company would itself like to take for personal benefit, or to pre-authorise opportunities more generally. They may, therefore, be reluctant to use this power to authorise these types of conflicts of interest.

Third, authorisation by the directors would not be available where all directors face a similar conflict, or where there are not enough disinterested directors to constitute a quorum. This may be the case in a private equity situation if the board is solely or mostly comprised of private equity appointees.

Fourth, even in cases where the directors would be willing to authorise a specific opportunity that a director puts to the board, this authorisation mechanism only works if the director is at liberty to make disclosure of the details of the opportunity to the rest of the board. That may not be possible if the opportunity came to the attention of the director while acting in a separate capacity, in which case she is likely to be subject to confidentiality restrictions on what can be disclosed to others.

2. Authorisation by the shareholders

Section 180(4)(a) says that the general duties of directors (which would include the duty to avoid conflicts) ‘have effect, subject to any rule of law enabling the company to give authority, specifically or generally, for anything to be done (or omitted) by the directors, or any of them, that would otherwise be a breach of duty'. This section therefore preserves the common law position that enables shareholders to pre-authorise an act or omission that would otherwise not be duty-compliant. This is true even though section 232(1) of the Act renders void any provision that ‘purports to exempt a director  …  from any liability that would otherwise attach to him in connection with any  …  breach of duty'. Section 232(1) must be read subject to section 180(4)(a), so that common law pre-breach authorisations are an exception to the general prohibition on exemptions.

The problem with the approach taken by the Act is that the common law position on pre-breach authorisation is far from satisfactory. In particular, it seems clear from the common law that not all breaches are capable of authorisation by the shareholders, unless perhaps approval is given unanimously, and it is also unclear whether anyone could authorise a breach when the company is on the verge of insolvency (but before an insolvency office-holder has been appointed), even if it would be in the company's interests for such an approval to be given.

The general proposition (which applies to both authorisations and ratifications) is often stated to be that ‘a majority of the shareholders may not by resolution expropriate to themselves company property, because the property of the company is something in which all the shareholders of the company have a (pro rata) interest’. In Cook v Deeks that rule was applied to contracts that the directors had diverted to themselves instead of entering into in the name of the company, and the court said that the shareholders should not be able to make a ‘present to themselves'. And although in Regal (Hastings) Ltd v Gulliver Lord Russell said that directors would not be liable to account for profits if their acquisition of shares had been approved ‘by a resolution (either antecedent or subsequent) of the Regal shareholders in general meeting', commentators have pointed out that in Regal, the directors made no attempt to damage the company to the detriment of the minority and, indeed, acted in a way that they thought would benefit the company, or at least that was the assumption the court made. Therefore the validity of any authorisation resolution might depend upon whether it was designed to deprive the company of a valuable business opportunity in favour of the majority shareholders, which, of course, it might well be, particularly in the case of a private equity-backed company.

But even if shareholders were able to authorise a specific opportunity, similar problems will arise as discussed above with regard to board approval. First, any authorisation that is given would need to be specific enough to cover the actual situation that arises. This means that the efficacy of a general authority would be open to doubt.

Second, the precise circumstances of the conflict may be confidential and commercially sensitive, and the director may be under a duty not to disclose those circumstances to the company or its (unrelated) shareholders. In such a case, it may be impossible to formulate a sufficiently specific resolution to cover the conflict.

Finally, as with board approval, the NED is unlikely to be able to take the risk that the shareholders will decline to authorise any specific opportunity, with the result that she is unable to exploit the opportunity for herself or for another party to whom she may owe duties, and approval may not even be practical in the case of a listed company or one with many widely-dispersed shareholders. It therefore seems unlikely that shareholder approval will generally be a viable mechanism for approving corporate opportunity conflicts.

3. Authorisation by the Articles

In Sections A and B, I have described the current state of the law on corporate opportunities, and argued that the 2006 Act narrowed the scope of the prohibition somewhat (at least in theory) by making it clear that the rule will not apply unless there is a conflict, effectively abolishing any separate no-profit rule whose application did not rely on there being a conflict. I have nevertheless suggested that the law on corporate opportunities does pose an ongoing problem for directors, especially part-time ones, and that the various common law and statutory authorisation mechanisms that exist will frequently not solve the problem. In light of this, the part-time NED might hope that the Articles of Association will come to her aid and, indeed, provisions that deal with conflicts of interest are, in fact, commonly included in a company's constitution. In the next section of this article I will examine how Articles of Association tackle this problem in practice.

1. General provisions on conflicts of interest

All 30 of the companies whose Articles I analysed gave the board of directors a general power to authorise a director's conflict of interest, taking advantage of the provisions of section 175, which allow such an authorisation when, in the case of a public company, there is a specific enabling provision in the company's constitution. That is noteworthy it itself, given that the DTI decided against including the power in the Model Articles for public companies on the basis that it would be appropriate for each public company to decide whether it wants to confer such a power on its directors. It seems that the top 30 companies were unanimous in their decision.

There is considerable variety in the wording employed by the 30 companies, but all give the directors a wide-ranging power to the full extent permitted by the Act, and some track the wording of the Act quite precisely in doing so. So, for example, the Articles of Rio Tinto plc state that:

Although such a procedure may be workable in some situations, in the vast majority of cases this position seems untenable for the real world NED, for the reasons given above. Even if she were permitted to make full disclosure of an opportunity discovered while she was acting on behalf of someone else, she would not be able to rely on the board being willing to authorise it in a specific case.

2. Outside directorships and other offices or employment

As discussed in Section A5 above, many NEDs will sit on the board of more than one company, and may need (or prefer to have) authorisation to do so by reason of section 175. It is, of course, possible for a company's Articles specifically to allow a director to take on outside directorships or other appointments, or to permit the board to authorise a director to take on outside appointments. Of the 30 sets of Articles I analysed, 13 (43%) made such an explicit provision and the remaining 17 (57%) were silent (see Figure 1). However, in all cases, the general ability to authorise conflicts of interest (or potential conflicts of interest) referred to above would in any event be wide enough to permit the board to authorise an outside appointment. As expected, no company in my sample included an absolute prohibition on outside appointments.

Corporate opportunities law and the non-executive director

All authors

Simon Witney

DOI:

http://dx.doi.org/10.1080/14735970.2015.1117349

Published online:

08 January 2016

Figure 1. Capacity authorisation in listed company Articles.

PowerPoint slideOriginal jpg (38.00KB)Display full size

Of the 13 instances where specific provision is made, only 3 (10% of the total) give the board an unconditional power to authorise outside appointments (as opposed to appointments with group companies), and these also give the board power to further specify how conflicts of interest arising out of such an appointment should be dealt with. The wording used in these 3 cases is similar, with a typical Article being that used by British American Tobacco:

Although these 13 companies contemplate outside appointments, none deals specifically with future corporate opportunities arising from that appointment. It may be that, in the case of those 3 that give the board power to specify how conflicts that arise out of an appointment should be dealt with, the board could stipulate that any corporate opportunities that arise to the director when acting in her outside capacity do not need to be offered to the company, but (as discussed above) the directors might find it hard to square such a blanket waiver of opportunities with their own duties, particularly without a more specific authority to do so from the shareholders.

3. Confidentiality

As mentioned above, one problem for the NED who discovers a corporate opportunity while working on behalf of someone else (perhaps as an employee or director of another company) is that she may owe duties of confidentiality to that other person and may not be in a position to make full disclosure to the board. The NED might take comfort from the fact that all 30 companies whose Articles I analysed include a provision protecting a director from an obligation to disclose information to the company, or to use it for the company's benefit, in circumstances where they owe a duty of confidentiality to a third party. However, in all cases, the provision is conditional. In 13 (43%) of the Articles surveyed, waiver of the requirement to disclose confidential information to the company only applies if, in the course of approving a conflict or a specific outside appointment, the board stipulates that such a waiver shall apply. The Articles of Royal Dutch Shell plc are typical of this type of provision:

In the remaining 17 (57%) of cases, the waiver of confidentiality does not itself require specific board approval but follows automatically once a matter or an outside appointment has been approved by the board. This is achieved in two slightly different ways. Four of the surveyed companies waive confidentiality only in relation to matters or appointments that have been approved; however, most of them (13 of the 17) give a general waiver where the director is under a duty of confidentiality to a third party but condition that waiver so that, where the duty arises from a conflict situation, the waiver will only apply if the conflict or potential conflict has itself been authorised. The British American Tobacco Articles are typical of the first type of provision:

Directors might also be troubled that the enforceability of even these more limited waivers of confidentiality may be open to some doubt. It seems clear from several cases dealing with both conflicts of interest and the duty to act in the best interests of the company (which is now the section 172 duty to promote success) that directors are under a positive duty to make disclosure of information that it would be in the interests of the company to know, and it does not appear to matter whether or not the relevant information was obtained in the course of acting as a director: in both Bhullar and IDC v Cooley, the director was under a duty to disclose information relating to a corporate opportunity and, in a slightly different context, a director has been held to be under an obligation to disclose his own misconduct. The latter finding was held by Arden LJ not to establish an independent duty to disclose, but to be an aspect of the fundamental duty of loyalty. It therefore seems clear that a duty to disclose relevant information forms part of the panoply of directors' duties. That being so, a provision in a company's Articles that waives that duty must be tested against section 232(1) of the Companies Act, as it would seem that it ‘purports to exempt a director of a company … from any liability that would otherwise attach to him in connection with any negligence, default, breach of duty'.

There are two possible arguments in favour of enforceability of these provisions. First, section 232 goes on to provide that provisions in a company's articles dealing with ‘conflicts of interest' that were previously lawful can continue to be used, despite the wording of section 232(1). However, it is far from clear whether a complete exemption from confidentiality was ‘previously lawful', and such a blanket exemption has never been included in the default Articles set out in previous Companies Acts.

The second, and superficially more attractive argument, is that section 180(4)(b) specifically provides that the general duties are not infringed by ‘anything done (or omitted) by the directors, or any of them' in accordance with ‘provisions for dealing with conflicts of interest' in a company's Articles. This provision would seem to apply to waivers of disclosure of confidential information, which would give rise to a conflict. However, there is academic support for the view that section 180(4), like section 232(4), should also be bounded by what was previously lawful, given the apparent conflict with section 232, and the circumstances in which the section was introduced into the Companies Act. There does not seem to be any clear authority for the proposition that a provision allowing a director to withhold confidential information that would be valuable to the company was lawful.

If that view is correct, then we would have to find an alternative reason to suppose that directors are entitled to maintain the confidentiality of information that they receive in a separate capacity. It would not be commercially viable to have part-time directors on boards with any outside interests at all unless some basis could be found to allow them to respect the confidentiality of information obtained in a separate capacity. I shall argue in Section D of this article that such a basis does exist.

4. Duty to account for benefits

Another provision included in 28 of the 30 sets of Articles of the companies surveyed (the exceptions being HSBC and BHP Billiton) expressly permits a director to keep ‘benefits' arising from authorised conflicts or outside appointments. In each case, the source of the benefit or the relationship giving rise to it must itself have been disclosed or authorised (as appropriate). The Articles deal with this situation in a variety of ways, but the provision in the Vodafone Articles is a typical example:

It is possible that this Article is intended by the companies concerned to deal with the situation where a corporate opportunity arises, and that opportunity places the director in a position of conflict because the opportunity is one that the company might be interested in pursuing. However, in that case, it seems likely that it is only designed to cover benefits or profits that arise directly and foreseeably from the situation or appointment authorised. So, for example, if a specific corporate opportunity were authorised by the directors, any profit arising from it could be kept by the director, or if an outside directorship were approved, any directors' fees or other remuneration would be covered. It seems unlikely that these Articles would be construed to allow a director to exploit and keep the profits from any profitable corporate opportunity within the scope of the company's business that she discovers while operating in an (authorised) separate capacity. In any event, it is doubtful whether any such broad exemption would be valid, given the restriction on exemptions from liability in section 232.

In summary, all 30 sets of Articles permit boards to authorise actual or potential conflicts of interest and, although only a minority specifically contemplate outside directorships or employment, the scope of the board's authority is broad enough to allow such appointments to be authorised. For authorised conflict situations, there are also waivers (in some cases automatic and in others at the option of the board) of confidentiality, and in most cases the directors can be allowed to retain ‘benefits'. However, none of these Articles explicitly deals separately with corporate opportunities, and none gives a clear and unconditional waiver of opportunities that arise to a director while she is acting in a capacity other than as a director of the company concerned.

Does this mean that a non-executive director of one of these companies, who has been granted permission by the board to also act on behalf of a third party, would have to offer an attractive investment opportunity discovered while acting in that separate capacity to the company, assuming that the company might have an interest in it? In the absence of a specific board approval of the conflict arising out of the opportunity, would the director face sanctions for breach of section 175 (or indeed other duties, such as the duty of loyalty)? If so, it would increase the risks for NEDs, and could put a director in a very difficult situation.

I will argue in the next section of this article that, despite the absence of specific provisions in the Articles, the law is not—or at least does not need to be held by the courts to be—so draconian.

1. When is a director not a fiduciary?

The starting point for an analysis of the bounded nature of fiduciary duties owed by a director is the uncontroversial assertion that a company director, whether full or part time, is not always in a fiduciary relationship with her company, even when the Articles are silent on the question. Indeed, the basic position in an owner-managed company is that the directors will not be required to exercise their votes as shareholder in a way that is consistent with their fiduciary duties as directors; they have separate ‘capacities' and are permitted to take their director's hat off when sitting in the general meeting. That position was re-stated by Warren J in Wilkinson v West Coast Capital and is clearly correct. It is also plain that directors may act in a private capacity in managing their personal financial affairs; for example, when making personal pension arrangements, a company director has no duty to offer any investment opportunity put to her by her pension adviser to the company before she can invest personally.

The cases have also recognised other specific situations in which directors do not owe duties to their company, or when those duties are curtailed in some way. For example, in CMS Dolphin Ltd v Simonet, Lawrence Collins J held that a director's power to resign was not a fiduciary power, and he was entitled to resign ‘however damaging it may be to the interests of the company'. In In Plus Group Limited v Pyke the Court of Appeal held that a director who had been excluded from the company of which he was a director did not commit a breach of fiduciary duty by competing with it. In each of these cases, the court is not seeking to argue that there would have been no breach of duty had a duty been owed—on the contrary, it is clear that there would have been—but that the scope of the duty owed was narrowed or eliminated by the circumstances. In In Plus Group, Sedley LJ said:

This proposition, that the scope of a duty differs according to the circumstances, finds widespread support in judicial summaries of the relevant principles in the cases; indeed, it is hard to find corporate opportunity cases in which this point is not made. In Boardman v Phipps, Lord Upjohn made it clear that rules of equity have to be applied ‘with particular attention to the exact circumstances of each case’, a view echoed more recently in In Plus Group Limited v Pyke, in which Brooke LJ (with whom Jonathan Parker LJ agreed) said, ‘the facts and circumstances of each case must be carefully examined to see whether a fiduciary relationship exists in relation to the matter of which complaint is made'.

It is therefore necessary to examine more closely when the duty to avoid conflicts arises, and the types of circumstances in which it can safely be assumed not to apply.

2. Opportunities discovered by executive directors in their 'spare time'

It is well established that it is not necessarily an answer to a claim for breach of the duty to avoid conflicts that the opportunity was discovered during a director's 'spare time'. Bhullar v Bhullar is clear authority for the proposition that a director who discovers an opportunity while not wearing her director's hat will nevertheless be in breach of duty if she does not take that opportunity to the company, and there is a conflict in pursuing it. However, it is significant that, in Bhullar, the directors had no other disclosed business interests, and according to the judge ‘had, at the material time, one capacity and one capacity only’. One of the key cases relied on by Jonathan Parker LJ in reaching his conclusion was the decision of Roskill J in Industrial Development Consultants Ltd v Cooley, and in that case the director concerned was the managing director—a fact that is stressed in the case itself and in the extracts Jonathan Parker LJ cites. Indeed, the phraseology used by Jonathan Parker LJ is borrowed from Roskill J, who says of the defendant in IDC v Cooley:

It is also clear from Bhullar that, although the no-conflict rule itself is said to be an ‘inflexible' one, its application is very fact-specific. Adopting the approach of Lord Upjohn in Boardman v Phipps referred to above, Jonathan Parker LJ says that ‘flexibility of application is of the essence of the rule', and the question is whether the ‘fiduciary's exploitation of the opportunity is such as to attract the application of the rule'. In Bhullar the circumstances in which the opportunity arose and the role that the director had with the company dictated that the scope of the fiduciary duty was wide enough to cover it; in other cases, the scope of the duty will be narrower.

It is true that Lady Justice Arden in Item Software (UK) Ltd v Fassihi and others, having cited Bhullar and IDC v Cooley, said: ‘These authorities go to show that the fact that a director was acting otherwise than as a director in making a secret profit is no answer to a claim by the company to recover the profits. ' However, as noted above, the cited authorities for that proposition are both cases where there had not been any clear acknowledgement by the company (indeed, there had been no acknowledgement at all) that the director was able to act otherwise than as a director at any time. In other words, his duties were all-encompassing because no limits had been set by the company. No other ‘capacity' had been disclosed and agreed to by the board or by the shareholders, and holding that the scope of the no-conflict rule extends to opportunities discovered in their 'spare' time for full-time directors does not imply that the scope of the duty to avoid conflicts automatically applies to part-time directors when they are acting in another capacity. It is that scenario that I will now consider.

3. Opportunities discovered while acting in another ‘capacity'

As discussed in the second section of this article, part-time (or non-executive) directors will often have other commercial interests, often including (but by no means limited to) directorships of other companies. While these commercial interests may not directly compete with those of the company, there will often be a realistic chance that they will discover attractive business opportunities in these other ‘capacities' which, for the reasons explained above, they may not be in a position to disclose to the company or to seek specific authority for personal exploitation.

This situation was considered in the Scottish case of Commonwealth Oil and Gas Company Limited v Baxter and Eurasia Energy. In that case, it was accepted that the director concerned was a director mainly for tax reasons, and had no executive functions nor received any remuneration from the company. It was also known to the company that he was pursuing investment opportunities in a personal capacity in a related or identical business area. Nevertheless, the court held that the director had fiduciary duties and that, in the circumstances of the case, he was in breach of those duties in exploiting an opportunity for his personal benefit rather than taking it to the company. Both the Lord President and Lord Nimmo Smith refused to accept the general proposition, advanced by counsel, that the duty to avoid conflicts only arises when a director is acting in his capacity as a director.

However, the reasoning in the case is instructive, and supports the view that the scope of the duty to avoid conflicts will be determined by the circumstances in which the director finds herself. Having referred to comments made by Rix LJ in Foster Bryant Surveying Limited v Bryant, who said that the extent of a director's duty ‘may depend on the circumstances', the Lord President went on to assert as follows:

Lord Browne-Wilkinson emphasises these points in Henderson v Merrett Syndicates:

4. Application of the test in practice

If the fact of having a separate capacity creates the possibility of a conflict, then (as discussed above) section 175 requires that the separate capacity should be disclosed and authorised. Once that has happened, it will be an important part of the factual matrix that the court will examine to determine the scope of the duties owed and, therefore, whether exploitation of a particular opportunity—or the withholding of information in relation to which the director owes a duty of confidence to a third party—amounts to a breach of duty.

In most cases, the court is likely to find that there is no duty to avoid conflicts of interest (or indeed any other duty—including, importantly, the duty to promote the success of the company) while a director is very clearly acting in that other (fully disclosed and accepted) capacity. Just as it is clear that there is no duty upon a director to vote any shares that she holds in the company in accordance with her fiduciary duties as a director, because she is acting qua shareholder, so a director who has an acknowledged separate capacity outside the company is likely to have no duty to the company, or very limited duties, when acting in that capacity. No exemption has been given by the company from the duty; it is simply that the law will not impose a duty in those circumstances.

It may be, of course, that a director has a number of different ‘capacities' with several different companies, such as a business angel investor who sits on the board of a number of portfolio companies. In each case, it will be necessary to analyse the extent to which the director owes a duty to each company in relation to opportunities discovered by her. Such an analysis might lead to the conclusion that the opportunity should be offered to one of the companies, if (for example) it arises out of the business angel acting in her capacity as a director of that company. It is possible that it might give rise to a conflict between two or more of the companies, particularly if the separate capacities have not been well defined and fully agreed to by the companies concerned. But if the separate capacities have been properly delineated, the business angel may not owe a duty to avoid conflicts to any of the companies in the circumstances in which the opportunity arises, and she will be free to exploit it personally (or to take it to any one of the companies if she so chooses).

For the well advised NED, therefore, it will be vital to make full disclosure of, and to get informed consent for any outside capacities that she wishes to maintain during the continuance of her directorship. Ideally, the Articles should specifically acknowledge that such outside capacities are permitted, subject to disclosure and approval, but the empirical examination discussed in Section C above reveals that only a minority of Articles do so. However, given that the question is not whether breaches of duty are permitted but whether the scope of a duty extends to the situation at hand, and since that is a matter to which all surrounding circumstances are relevant, informed consent of the board in a way permitted by the Articles to that outside capacity should lead the courts to define the scope of the duty narrowly enough to allow directors to take opportunities that accrue to them in that separate capacity for their own benefit (or the benefit of some other company or business to whom they owe duties).