plus Marking Notes
1000-1500 words limit.
Shine Ltd was established some five years ago to manufacture industrial solvents and cleaning solutions, and John was appointed managing director.
The company’s main contract was with XYZ plc a large industrial conglomerate.
In the course of its research activity, Shine Ltd’s scientists developed a new super glue. John was very keen to pursue the manufacture of the glue but the board of directors overruled him and decided that the company should stick to its core business.
The managing director of XYZ plc is a friend of John’s and has told him that XYZ plc will not be renewing its contract with Shine Ltd as he is not happy with its performance. He also told John that he would be happy to continue to deal with him, if only he was not linked to Shine Ltd.
Following that discussion John resigned from his position as managing director of Shine Ltd and set up his own company, Flush Ltd which later entered into a contract with XYZ plc to replace Shine Ltd. Flush Ltd also manufactures the new glue discovered by Shine Ltd’s scientists, which has proved to be very profitable.
Task:
Advise the board of Shine Ltd as to whether they can take any action against John or Flush Ltd.
Suggestions:
1. This question requires an analysis of the doctrine of corporate opportunity and the rules relating to directors’ duties. Section 170, 174, 175, 177, 178, 180 and 182 of the Companies Act (CA) 2006.
2. Breach of the equitable principles and common law rules.
3. Section 178(2) specifically provides that the directors’ duties are enforceable in the same way as any other fiduciary duty owed to a company by its directors and remedies available may include:
– damages or compensation where the company has suffered loss;
– restoration of the company’s property;
– an account of profits made by the director; and
– rescission of a contract where the director failed to disclose an interest.
4. IDC v Cooley (1972) case conclusion: …..The operation of the previous fiduciary duty not to make an undisclosed benefit from the position as directors and not to profit personally from what is a corporate opportunity even survived after the director in question has left the company….
“Cooley was an architect employed as managing director of IDC. He was put in charge of negotiations with a gas board, which had approached IDC concerning the design of a gas holder. During the negotiations it became clear that the gas board was unwilling to place the contract with IDC. At this point, Cooley resigned, falsely pleading ill health. Then he obtained the design contract with the gas board.
HELD: Cooley must pay the profits from the contract to IDC, since he had abused his position as agent of the company and used his inside knowledge to obtain the contract, creating a conflict of interest. Information which came to him while he was managing director and which was of concern to the company and relevant for the company to know, was information which it was his duty to pass on to the Board. It was irrelevant that his behaviour had not necessarily caused IDC to lose the contract.”
5. …. Rules against allowing a conflict of interest to arise apply even if the company cannot itself take advantage of the opportunity wrongly misappropriated, which continues the previous very strict application of principle (Regal (Hastings) v Gulliver (1942)).
6. Gilford Motor Co v Horne (1933).
Mr Horne was employed as managing director of GMAC Ltd. In his contract of employment Horne agreed that after leaving GMC he would not solicit its customers. When his contract was terminated, Horne did begin to solicit GMC’s customers. He knew that GMC would not allow him to get away with this, so he formed a company, the sole purpose of which was to employ him while he continued to solicit the customers. Horne’s defence, when sued by GMC was that his promise in his contract of employment was binding only on himself, not on the new company.
HELD: An injunction was granted preventing either Horne or the company from soliciting GMC’s customers. The court was satisfied that the company had been formed as a device, a stratagem , in order to mask the effective carrying on of a business, the purpose of which was to enable him to do what he had agreed not to do.
