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Directors’ Duties: A Critical Analysis in Light of Reforms in Part 10 of the Companies Act 2006 – Part Two
Jiayue (Leanne) Ma, UCL, London, UKSynopsis
In the previous article Part One, the author has sought to show that s.172 and s.175 of the Companies Act 2006 introduced key positive changes to promote efficient business decision-makings under an enhanced disclosure regime.
Part Two below deals with an important remaining question: where no authorisation has been acquired for a possible conflict of interest between the director and the company, what circumstances are likely to give rise to a real sensible possibility of conflict under s.175(4)(a) of the Companies Act 2006. In determining this question, it is argued that English law should adopt the US corporate opportunities framework with an expanded-line-of-business test as the instantiating rule.
Under the corporate opportunities framework, the question is to whom the opportunity belongs as between the director and the company. In determining what is a corporate opportunity, factual circumstances can be taken into account, including the capacity in which the director was approached and the essentiality of the opportunity to the corporation. This will help prevent directors' personal exploitation of real corporate opportunities whilst allowing other valuable investments to be pursued.
The corporate opportunities framework, itself a continuum from flexibility to strictness, must be placed in the specific legislative context in question. In the English legal context, a corporate opportunities framework should be supported by the expanded-line-of-business rule. The expanded-line-of-business test is both more certain than the 'fairness' test and more prohibitive than the company's interest test, capturing future profit-making activities of interest to the company as corporate opportunities. The classic account of the expanded-line-of-business rule is set out in Guth v Loft, a leading Delaware case on corporate opportunities. The test includes what is 'logically and naturally adaptable' to the business based on its existing knowledge, experience and finances. While English cases such as Bhullar v Bhullar and O'Donnell v Shanahan have emphasised the capacity-based approach, the respective geographical proximity of the property and the diversification into the property investment may have rendered the opportunity to fall within the expanded line of the business.
Lastly, s.175(4)(a) of the Companies Act 2006 provides the scope for using the expanded-line-of-business test to define what a 'reasonably likely' conflict is. The case concerning a partnership Aas v Benham also shows English law's potential think through the lens of 'who owns the opportunity' as between the company and the director. All in all, the expanded-line-of-business test spells out the content of the no-conflicts duty by defining which opportunities, if exploited by personally directors, will cause a conflict between the interest of the directors and their company.
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