The Corporate Opportunity Principle

Introduction

This paper outlines the principles and procedures governing a director of a company who personally pursues a commercial opportunity which may otherwise have been pursued by the company. As a result of their fiduciary relationship, directors are subject to the general equitable obligation not to take advantage of information or property acquired by virtue of their personal position. In circumstances where directors personally take up a business opportunity that was otherwise available to a company, they may breach this duty¹.

It is important to consider the general law and statutory provisions relating to corporate opportunity and their treatment of fiduciary duties owed by directors. This paper explores the corporate opportunity principle in assessing whether a person owes an obligation to the relevant company. If found to owe an obligation to the company, it is necessary to determine in what capacity that person was acting when he or she first received notice of the opportunity. In the event that a director does exploit an opportunity then that director may be liable under the relevant rule.

Directors Duties

General law

It is important firstly to consider the fiduciary relationship that exists between directors and their respective companies. A primary feature of a fiduciary relationship is that the director undertakes to act on behalf of, or in the interests of, the company in the exercise of that director's power. There are positive duties such as acting in good faith in the best interests of the company for proper purposes and with due care. There are negative duties such as not putting themselves into a position where their personal interests conflict with the interests of the company.

In essence, the general law provides that a director is accountable to his or her company for profits or benefits he or she derives by reason of, and in the course of, the exercise of the fiduciary function. Similarly, a director is not free to divert or destroy a particular opportunity being pursued or under consideration by the company.

However, shareholders of the company may modify the operation of this duty by giving their fully informed consent to a course of action by a director.

Statutory law

It is important to have an understanding of both the general law and statutory provisions because the general law principles regarding fiduciary duties have only been supplemented and not entirely replaced by the provisions of the Corporations Act 2001 (the Act).

The statutory duties are both broader and narrower than the general law. The Act expressly provides that directors of a company may not "improperly" use their position, or information gained because of their position to:

• gain an advantage for themselves or for someone else
• cause detriment to the company².

Under the Act the advantage, however, may be either for the director or for any other person, whereas under the general law the principle only extends to benefits enjoyed by the fiduciary or by a person with knowledge of the fiduciary's improper conduct.

While it may be argued that a statutory duty cannot be waived³, we conclude the better view to be that fully informed consent of the shareholders before any breach of a statutory duty would redefine the nature of what might be a "proper" use of position or information by the director. This is the essential nature of shareholder approval at common law. Such an approval would also be taken into account in any discretion exercised by a court under section 1318(1) of the Act to provide relief from liability for breach of the statutory provisions.

Consequences and relief from consequences

The potential civil consequences of breach of duty include the director accounting to the company for profits earned and being liable for statutory fines and payment of damages⁴. There may also be criminal consequences of breach if the director was reckless or dishonest⁵. If in civil proceedings against a director for default, breach of trust or breach of duty, it appears to the Court that the director may be liable but that the director has acted honestly and, having regard to all the circumstances of the case, the director ought fairly to be excused for the default or breach, the Court may relieve the director either wholly or in part from liability on such terms as the Court thinks fit.⁶

Principles And Procedures Governing Corporate Opportunity

Directors duties - corporate opportunity

Directors owe fiduciary duties to the company they serve. Conflicts of interest typically arise when an individual director of a company proposes to exploit an opportunity personally or for the benefit of a person or business other than the company. The central idea in a fiduciary relationship is service of another's interests and so fiduciaries must avoid putting themselves in a position where they will be tempted into their own interests or any interest other than their principal's. A fiduciary may pursue such an opportunity only with the fully informed consent of the principal.

There are three fiduciary rules that apply:

• Company directors must not have a personal interest or engagement with a third party except with the full consent of the company (conflict rule)
• Company directors must not abuse their position for their own or a third party's advantage unless the company gives its full consent. Thus they must account to the company for any gain they so happen to make in connection with their fiduciary office (profit rule)
• Company directors must not mistake company property as their own or appropriate that property to a third party's benefit (misappropriation rule).

Any director who diverts a business opportunity away from the company for personal advantage may be accountable under both the conflict and profit rules. It is common for these two rules to overlap, as they both cover such a wide range of fiduciary wrongdoings.

Note that the profit rule applies to all fiduciaries and is a central theme of fiduciary responsibilities. It can be difficult to determine whether an opportunity belongs to a director in their private capacity or whether it is a profit-making opportunity for the company. In applying the profit rule courts must decide whether to:

• deem the director accountable regardless of whether the company is unable to pursue the opportunity
• allow directors to exploit their own benefit opportunities in a private capacity i.e. where the opportunity is not taken up by the company and the director personally pursues the opportunity for their own advantage
• permit a director to end fiduciary responsibility by resigning from the company.

In respect of (a) above, directors have been held accountable even when they have acted in the interests of the company, for example, when directors have taken up an opportunity personally which the company itself did not have the funds to take up alone⁷. In this situation directors cannot retain any benefit from such an opportunity and must hold it on behalf of the company⁸.

In respect of (b) above, where an opportunity is not taken up by the company and the director personally pursues the opportunity after obtaining the fully informed approval of the company, the director may be entitled to retain the profits made⁹. A director who claims that a transaction has been ratified by the fully informed consent of shareholders in a general meeting, bears the onus of establishing that the material facts of the transaction have been fully and frankly disclosed to shareholders¹⁰. Note that in some cases either the board or shareholders may give fully informed consent¹¹.

If directors wrongfully cause the company to assign an existing contract for their own benefit, there is a misappropriation of property that is within the rule. As a general rule, directors are restrained from taking remuneration or other benefits from the company's resources unless:

• authorised by law
• authorised by the company's constitution
• with the full consent of the company in general meeting.

The misappropriation rule is easy to apply in situations where the director takes an identifiable asset of the company without consent. However, difficulty may arise where the property in question is not easily identifiable in nature.

Occasionally courts treat information as property and as a result it is said that a fiduciary who misuses corporate information has offended the misappropriation rule. However, if it is acknowledged that information is not property, instead a fiduciary who makes improper use of information, may then contravene the conflict and profit rules, and thus be liable for a breach of fiduciary duty.

Application of the corporate opportunity principle

In assessing the corporate opportunity principle it must firstly be determined whether a person owes an obligation to the relevant company. If a person is a director then they may owe statutory, general law and fiduciary obligations to the company.

Assuming that the person has an obligation to the company, it is necessary to determine in what capacity they were acting when they first received notice of the opportunity. For example, were they acting in their capacity as a shareholder or as a director of the company? In the event that they received notice of the opportunity in their capacity as a director, then they may be subject to additional duties and obligations.

Note that a director is not free to divert or destroy a particular opportunity being pursued or under consideration by the company. In the event that a director does exploit an opportunity then that director may be liable under the relevant rule. It is necessary to determine the scope of the corporate opportunity at the time of the proposed exploitation in order to assess what is included in the opportunity. Exploitation may occur if a director pursues the particular opportunity for another party, without the full consent of the company.

In conclusion, the corporate opportunity principle arises when any director diverts a business opportunity away from a company for their personal advantage or for the benefit of another company. Doing so may result in a breach of their statutory, general law and fiduciary obligations to the company. In assessing the corporate opportunity principle it must be determined whether the person owes an obligation to the company and the capacity in which they were acting when they first received notice of the opportunity. These factors are instrumental in determining if an opportunity has in fact been exploited.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.