Liability for breaching duty of loyalty - corporate opportunities Flashcards
The rule
Any time a director or officer learns of information about a business opportunity , either through their position on the board or at the company, or under circumstances that should reasonably lead the director or officer to believe that a person offering the opportunity expects it to be offered to the company, that director or officer is forbidden from “taking” that opportunity
- Even if the company itself doesn’t have the financial ability to pursue the opportunity
- Can last even after directors or officers leave the company, certainly if the directors or officers learned of the opportunity during their employment [Canaero]
Regal (Hastings) Ltd. v. Gulliver [1942 HL]
R incorporated A to take on new leases from E. E later became worried and asked directors of R to personally guarantee lease payment. Each of the directors personally bought into A - they knew share value would increase b/c potential sale of R going on. Purchaser of R and A sued against former directos as they took the business opportunity to invest in A and quickly resell.
HL: ruled against directors, order them to pay all profit from stock sale
- no findings of fraud, bad faith
- The liability doesn’t depend on fraud or if there was gonna be any benefit/damage to P - Those who by using of a FD to make a profit have to account for it.
- Directors are in a FD to R, and acquired the shares simply b/c of their relationship as directors and did so in the course of execution of that office.
- Usual remedy: a constructive trust is imposed on the property or shares or profit: the breaching party is held to have taken the opportunity in trust for his corp, and ordered to return all property or profits to the wronged corp.
Had the directors obtained shareholder ratification (antecedent or subsequent), they would not have been liable.
Corp opportunity
Unclarity in law
Depends on many factors
Peso Silver Mines Ltd. V. Cropper
“outermost boundary of permissible behaviour in the corporate opportunity context.”
Facts: PS rejected opportunities to buy mines - PS was short on fund, no evidence that the mines would produce, etc. The geologist who owned the mines approached C, a director of PS, who agreed to buy and incorporated a new corp. C later disclosed his interest in these mines, new president of PS asked him to give over his interest, C refused.
SCC: ruled for C - “impossible to say that the respondent obtained the interests he holds by reason of the fact that he was a director of Peso Silver.”
- C was known to have interest in other mines when he was hired by PS.
- no evidence that C shaped the discussion at PS when the interest was refused at first
- Test from Regal v Gulliver: fiduciary relationship – in course of mgmt. – use of opportunities/knowledge as directors – profit was made because of fiduciary relationship
- Where director, acting in that capacity, learns of an opportunity within the corporation’s line of business, he must offer the opportunity to the corporation (as Cooper did)
- if the company decides not to pursue the opportunity, director is free to pursue it
- No prohibition at common law or by statute against a person being a director of competing corporations
Canadian Aero Services Ltd. v. O’Malley
Facts: Two officers of C working to get k for C. Later resigned and incorporated a competing corp and got the k.
Courts: ruled for corp
- O and Z were agents of corp, have FD to C, thus cannot take corp opportunity - continuous even after resignation.
- The test in Regal requires the action occur during course of office - equity establishes a principle that a director or officer cannot appropriate a business opportunity that in fairness should belong to the corporation. This duty survives after termination of employment relationship
- liability does not depend on proof that C, but for the intervention, would have obtained the K
- Damages are not intended to compensate the corp but to compel fiduciaries to answer for their gain.
