Diversion of the corporate opportunity doctrine

Directors have a fiduciary duty to act in the best interests of the company they direct and its shareholders.  This duty owed by the directors (Directors) arise by virtue of the fiduciary relationship in equity between a director and the company and the Corporations Act 2001 (Cth) (Act).

What is the corporate opportunity principle?

One particular duty of a Director as shown by the case law is not to make a personal gain at the expense of the company.  Directors who personally exploit an opportunity or knowledge gained by virtue of their position may be breaching their fiduciary obligations.  This is referred to as the corporate opportunity principle, and is characterised by a conflict between a Director’s personal interests, and the interests of the company.^[1]  In these conflict situations, the Director’s fiduciary duty to the company prevents them from acting in their own interest.  In recognition of the importance of this duty is the Act, section 182 of which expressly prohibits directors from misusing:

• their position as a director;^[2] or
• information obtained by virtue of this position;^[3] or
• gain an advantage for themselves or someone else; or
• cause detriment to the company.

Section 182 is a civil penalty provision, meaning that if breached, ASIC can impose pecuniary penalties on a Director who contravenes it.  Further, in equity, the company may be entitled to seek relief from the courts against a Director who breaches their fiduciary duty to the company.

Remedies that may be available to a company include an account of profits, equitable compensation from the Director, and imposition of a constructive trust over the profits made by the Director.

When can a Director personally pursue an opportunity?

Notwithstanding the Director’s many duties to the company, there are circumstances where there Director may personally pursue an opportunity.  These are explained below.

Fully informed consent

The most appropriate method of refuting liability under the Act or in equity is to obtain fully informed consent from the company to pursue the opportunity in a personal capacity.  In obtaining consent, the Director must disclose all material facts and information to the company to allow it to make an informed decision whether to provide its consent or not.  There is authority that consent obtained from the company’s board of directors is sufficient.^[4]

Opportunities outside scope of “trust and agency”

Where a Director personally pursues an opportunity which arose by virtue of their position as director, liability may be found not to apply where the opportunity was “outside the scope of the trust and outside the scope of the agency”.^[5]  In other words, where the opportunity was not related to the person’s position as a director, they will not be acting in breach of their duties to the company by pursuing it personally.

For example, in the context of intellectual property the court has stated that the mere fact that a person is a Director of a company should not disqualify them from taking out a patent for an invention made by them during their period of service in that position.^[6]

What should you do if you wish to personally pursue an opportunity?

The corporate opportunity principle makes it clear that Directors should tread very carefully when considering pursuing opportunities for personal profit.

Best practice would be to seek the fully informed consent of the company.  Even where a Director is confident their actions would not amount to a breach of their duties to the company, receiving the fully informed consent company will go a long way to relieving the Director of liability.

Where it is not possible to receive the fully informed consent of the company, or it is otherwise undesirable to inform the company of the opportunity, one should consider how the opportunity came to fruition.

If it is a direct result of his or her position as Director, then pursuing that opportunity without receiving the fully informed consent of the company is likely to amount to a breach of duty to the company.

Resigning as Director will not offer protection from an action for breach of fiduciary duty, however, if the opportunity is substantial and you will not be able to adequately service the company, this should be considered.

Links and further references

Cases

Cornerstone Property & Development Pty Ltd v Suellen Properties Pty Ltd [2014] QSC 265

Eastland Technology Australia Pty Ltd v Whisson [2005] WASCA 144 at [67]

Queensland Mines Ltd v Hudson (1978) 18 ALR 1

Regal (Hastings) Ltd v Gulliver [1942] UKHL 1

Further information about directors duties

If you need advice regarding your duties as a director of a company or have a dispute with other directors, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] Regal (Hastings) Ltd v Gulliver [1942] UKHL 1.

[2] Corporations Act 2001 (Cth) s. 182.

[3] Corporations Act 2001 (Cth) s. 183.

[4] Queensland Mines Ltd v Hudson (1978) 18 ALR 1.

[5] Cornerstone Property & Development Pty Ltd v Suellen Properties Pty Ltd [2014] QSC 265.

[6] Eastland Technology Australia Pty Ltd v Whisson [2005] WASCA 144 at [67].

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