does it matter how the law thinks about corporate opportunities?

Vol25 No 4 November 2005

Legal Studies

Does it matter how the law thinks about corporate opportunities?

David Kershaw* School of Law. University of Warwick

English opportunities regulation is confused about its relationship to the concepts of ownership and property. Recent reform proposals from the Company Law Review Steering Group would have changed English law’s dominant regulatov lens: the way in which it thinks about the opportunities problem, from an approach focused on conflicts of interest to one focused on the ‘ownership’ of opportunities. This ownership approach is commonly referred to as the corporate opportunities doctrine. This article argues that the proposal failed as it did not consider the interpretative possibilities generated by changing the regulatory lens. Howe,,er, the proposal inadvertently makes a contribution to the debate as it directs our attention to the function and meaning of ownership concepts in the opportunities context. Property in the opportunities setting is simply a label for qualified ownership as between the director and the company. However, the article argues that by understanding references to property in terms of traditionul notions of property English law and commentary has obstructed the consideration and development of a long-standing English corporate opportunities doctrine.

* Moorhead for comments on earlier versions of this article.

My thanks to Marlies Braun, Steven Elliott, Bob Kershaw, Eva Micheler and Richard

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1. INTRODUCTION

There are two conceptually different ways in which common law jurisdictions think about the problem of how to regulate the situation in which a director personally exploits an opportunity which she became aware of during the course of her tenure as a director. One approach thinks in terms of loyalty, the other in terms of ownership. The first approach, the no-conflicts approach, asks whether by profiting from the business opportunity the director’s personal interests are brought into conflict or would potentially be brought into conflict with the company’s interests or, stated differently, would the personal exploitation of the opportunity compromise the director’s duty of loyalty to the company? The second approach asks to whom, as between the director and the company, does the opportunity belong; the right to exploit the opportunity follows ownership, as if it were the property of the director or the company. English law is traditionally understood to think about the opportunities problem through the first no- conflicts framework, whilst most US states have adopted the second ownership framework, which is commonly referred to as the corporate opportunity doctrine.’

Recently the boundary in English law between the no-conflicts approach and the corporate opportunity’s ownership approach has been unsettled by the Company Law Review Steering Group’s (CLR) proposed codification of directors’ duties,: which was adopted by Principle 6 of the government’s White Paper on Modernising Company L ~ r t ? . ~ This proposed codification (the CLR Proposal) adopts an ownership rather than a no-conflicts framework. Principle 6 incorporates the idea that an opportunity or information about an opportunity may belong to the company in providing that a ‘director or former director of a company must not use for his own or anyone else’s benefit any property or information of the company, or any opportunity of the company which he became aware of in the performance of his functions as director’ (emphasis added).‘ More recently, the government has published a new White Paper entitled Company Law Reform’ which replaces Principle 6 and leaves aside the language of ownership in opportunities regulation.6 According to clause

1. This ownership approach is referred to in this article as the corporate opportunities approach or framework. 2. Company Law Review Steering Group Modern Company Law for a Competitive Economy: Final Repor? Urn 01/942 and Urn 01/943: Annex C: Statement of Director’s Duties. 3. Modernising Company Law (Cm 5553,2002). 4. Principle 6 provides that: ‘a director or former director of a company must not use for his own or anyone else’s benefit any property or information of the company, or any opportunity of the company which he became aware of in the performance of his functions as director, unless (a) the use has been proposed to the company and the company has consented to it by ordinary resolution; or (b) the company is a private company, the use has been proposed to and authorized by the board, and nothing in the constitution invalidates that authorization; or (c) the company is a public company, its constitution includes [a] provision enabling the board to authorize such use if proposed, and the use has been proposed to and authorized by the board in accordance with the constitution.’ 5. Company Law Reform (Cm 6456, 2005). 6. Clause B6( 1) sets forth the duty in traditional no-conflicts terms (see below, text to n n 13-30): ‘( 1) As a director of a company you must avoid a situation in which you have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.’

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B6 of the draft clauses set forth in the Company Law Reform White Paper the concepts of ‘property’, ‘information’ and ‘opportunities’, which the director is prohibited from exploiting, are no longer qualified by being ‘of the company’.7

This article submits that underlying English case law, scholarship, the codification debate and the reform proposals is an inadequate understanding and awareness of the meaning and the implications of deploying the regulatory lens of ownership in English opportunities regulation. Principle 6 can be seen as the crystallisation of this flawed understanding and awareness, and, accordingly, although no longer on the legislative agenda, it remains a useful portal through which to engage these failings.

Principle 6’s adoption of the corporate opportunities lens generated considerable confusion about exactly what Principle 6 would have enacted, the extent of which has not been fully explored in the scholarly literature. This confusion rendered Principle 6 a failure as a law reform project and its rejection in the government’s recent White Paper is to be welcomed. This article’s exploration of the confusion lends support to the rejection of Principle 6. However, the primary purpose of this exploration is: first, to consider the meaning of the concepts of ownership, property and belonging in opportunities regulation; second, to consider the possible relationship between the language of ownership and English law’s no-conflicts approach; and third, to ievisit the ways in which English opportunities regulation has previously deployed these concepts; to see, in particular, that the failure to understand the specific meaning of the language of ownership in the English opportunities context has inhibited the development of English corporate opportunities approaches.

The first part of the article considers in more detail the no-conflicts and the corporate opportunities frameworks. It uses the US experience of the corporate opportunities doctrine to show that when the concepts of ownership, property and belonging are deployed in opportunities regulation we must be careful not to assume that the use of these concepts implies the existence of a bundle of rights which we may more commonly associate with property. The language of ownership is merely a label for a set of very different rights. Furthermore, the US experience shows us that the there is no necessary relationship between this way of thinking about the opportunities problem and the types of rule which are determinative of this qualified ownership.

These insights allow the article to open up Principle 6. The article considers two plausible interpretations of Principle 6’s adoption of an ownership or corporate opportunities framework. The first available interpretation is that the adoption of a corporate opportunities framework is intended merely to restate what the no-conflicts approach actually does: the functional outcome of its application. This is consistent with the way in which many contemporary commentators deploy the concepts of ownership in the opportunities debate. According to this interpretation, Principle 6 intended that the existing no- conflicts rules would be employed in determining, as between director and company, ownership of an opportunity. That is, the opportunity could be treated as belonging to the company if personal exploitation by a director would result in his interest conflicting with or possibly conflicting with the company’s

7. Clause B6(2): ‘This applies in particular to the exploitation of any propem, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity).’

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interests. From this point of view, the CLR attached a different framework to the existing no-conflicts principle; it simply restated the no-conflicts approach in corporate opportunity terms. This interpretation, however, is counter- intuitive: why change the regulatory lens if the intention is merely to restate the law.

The second available interpretation is that Principle 6's adoption of a corporate opportunity framework refers us away from the no-conflicts approach to an existing English corporate opportunities approach that could be drawn upon in determining whether or not an opportunity belongs to the company. However, scholars who view the corporate opportunity framework as a potential, but thus far not admitted, US import argue that English law does not have any distinct or developed corporate opportunities approach. Accordingly, these scholars argue that although the CLR apparently redirected English law towards a corporate opportunities approach it failed to specify the rules which determine whether an opportunity or information about an opportunity belongs to the company. That is, they argue that had Principle 6 been enacted it would have provided English law with an unfamiliar framework without instantiating rules.

Contrary to this submission, this article argues that English law offers two distinct corporate opportunity approaches with instantiating rules. English law has for sometime viewed the opportunities problem through the corporate opportunity framework. This approach, however, has been silenced by the failure to distinguish between the position that opportunities are actually owned by or are the property of the company from the corporate opportunities approach which although employing the labels property, belonging and ownership merely creates rights between the director and the company which are akin to property rights to the extent that they enable one party to exclude the other party from making use of the opportunity. This distinction allows us to reconsider the House of Lords discussion about information and property in Boardman v Phipps and to see that Boardman v Phipps,' drawing on Aas v Benham' and Dean v MacDowell," contains a dormant English corporate opportunities doctrine. The second line of cases in which English law has adopted a corporate opportunities approach is found in the more recent first instance decisions in Island Export Finance v Umunna" and CMS Dolphin I.' Sirnonet" in which former directors exploited opportunities which were encountered during the director's tenure. The article submits that recent authority implicitly disapproving of these developments again fails to understand the distinct meaning of the language of ownership in an opportunities setting.

The article then considers the extent to which these corporate opportunity approaches are consistent with the underlying principles and policy positions of the no-conflicts case law. It argues that the Aas v Benham approach is not only epistemologically consistent with the no-conflicts approach but articulates more clearly what remains implicit in the no-conflict approach. In contrast, the more recent corporate opportunity approach is epistemologically unsound.

8. [ 19671 2 AC 46. 9. [1891] 2 Ch 244. 10. [1876] 8 Ch D 345. 11. [1986] BCLC 460.


11. THINKING ABOUT THE OPPORTUNITIES PROBLEM

The no-conflicts framework

Directors of a company have a fiduciary duty to be loyal to their company. A corollary of this duty of loyalty is the duty to ensure that a director does not put herself in a position in which her personal interests conflict with, or may possible conflict with, the interests of the company.” Accordingly, an opportunity that would be of interest to the company cannot be personally exploited by the director because such exploitation would result in a conflict of personal and company interests. If the director personally exploits such an opportunity the company can require the director to account for any resulting profits.

Through this approach the lens of conflicts provides English law with its criteria of relevanceI4 when regulating the opportunities problem. This lens directs attention to the company’s interests, the director’s interests and the extent to which and the ways in which they actually or potentially conflict. This way of thinking about the problem reduces the complexity of an opportunities event and the types of issues that are relevant to opportunities regulation, but does not, as of itself, determine whether the director is allowed to exploit the opportunity. This is resolved by determining the nature of the company’s interests with which the director’s interest can conflict and the type of conflict that is prohibited. Do the company’s interests cover any profit-making opportunity or only opportunities that are connected to what the company already does? Is the law concerned with an actual conflict, any theoretical possibility of conflict or, following a close analysis of the facts, a realistic possibility of conflict? The answer to these questions determines whether the law is considered to be strict, allowing very limited scope for a director to exploit an opportunity, or flexible, allowing a director to exploit an opportunity where on the facts it does not compromise his loyalty to the company to allow him to do so. Strict no-conflicts regulation takes a broad view of the company’s interests and is concerned with the possibility of conflict regardless of factual claims that allegedly mitigate the reality of conflict. Flexible no-conflicts regulation would take a narrower view of the company’s interests and would allow personal exploitation of the opportunity if the facts of the case demonstrated that the apparent conflict was not real. This conflicts way of the thinking about the opportunities problem is, therefore, consistent with both flexible and strict regulation of the opportunities problem.

English law’s no-conflicts approach is generally understood to be strict, as is clear from the leading cases of Bourdman v Phipps and Regal (Hustings) I’ Gulliver.Is The courts have been willing to find that there is a possibility of

12. [2001] 2 BCLC 704. 13. Per Lord Cranworth, Aberdeen Railway v Blaikle ( 1 854) 1 Macq HL 46 1 at 47 1. 14. H Collins Regulafing Confracfs (Oxford: Oxford University Press, 1999) p 38 argues that: ‘doctrinal concepts are closed in the sense that they direct the legal examination of the facts of a dispute with strict criteria of relevance. Some facts will be relevant to legal reasoning, because they need to be established to satisfy the legal rule, whereas others will be irrelevant to the legal inquiry.’ 15. 119671 2 AC 134.

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conflict even when there are mitigating facts to suggest that this possibility is not real. This strict no-conflicts principle was recently affirmed by the Court of Appeal in Bhullar v Bhullar‘6 where it was held that there was a possible conflict between a director’s personal interests and the company’s interests where a director identified and, together with another director, purchased a real estate opportunity situated next to an investment property owned by the company. The court found that there was a real, sensible possibility of conflict even though: the director identified the opportunity in his personal time; the company’s main line of business was in the retail supermarket trade and it only had one investment property; the company was deadlocked due to shareholder disagreement; and where the shareholder group that initiated the claim had, prior to the identification of the opportunity, made it clear at board level they had no further interest in acquiring any additional investment properties through the company.

Some scholars argue that English law offers a second, independent, if similarly strict, regulatory lens, the no-profits lens, which provides that directors cannot make a profit by reason and in the course of their directorship. The no- profit rule was set forth in the corporate context in Regal (Hustings) v Gulliver. As Regal had insufficient funds to capitalise its acquisition subsidiary in the amount of E5,000, the directors of the company and the company solicitor subscribed, in aggregate, for E3,OOO of equity capital. On the subsequent sale of the acquisition subsidiary the directors made a profit. The new owners of Regal took proceedings against the directors for breach of fiduciary duty. The directors were deemed to have acted in good faith and argued that without their investment Regal itself would have made no profit at all. The House of Lords held that these mitigating submissions were irrelevant. For Viscount Sankey, applying the no-conflicts approach, the directors were liable to account as they had put themselves in a position where their personal interests conflicted with those of the company. For the remaining Law Lords, applying the no- profit rule, the directors had made a profit by reason and during the course of their directorships and, therefore, were liable to account for the profits.

There is English and commonwealth authority for the position that the no- profit rule should be viewed as separate and independent from the no-conflicts approach. Most recently in Quarter Master ( U K ) Ltd v Pyke, Paul Morgan QC categorised the no-profit rule separately from the no-conflicts principle, which he described as ‘allied to but ... separate from the no-profit rule’.” Morritt LJ i n Don King Productions Inc v WarrenI8 cited with approval the Australian case of Chan v Zacharia in which Dean J identified the no-conflicts principle and the no-profits rule as separate themes which embodied ‘one “fundamental” rule’.’’ Several commentators have expressed support for this position. Most recently Pearlie Koh has argued ‘that it is perhaps more accurate to say that these are independent rules’.*’ It is submitted, however, that in English law

16. [2003] BCC 7 1 1. 17. I20041 EWHC 1815. 18. [2000] Ch 291 at 341. See also GencorACP Ltd v Dalby [ZOOO] 2 BCLC 734; and John Taylors vMasons [2001] EWCA 2106. 19. (1984) 154 CLR 178 at 198. 20. P Koh ‘Once a Director, Always a Fiduciary’ (2003) 62 CLJ 403 at 406. See also, R P Austin ‘Fiduciary Accountability for Business Opportunities’ in P D Finn (ed) E q d y and CommercialRelarionships (Sydney: The Law Book Company Ltd, 1987) pp 146147.


the no-profit rule has not, as yet, become detached from the no-conflicts approach so that its final point of reference in determining its scope of application is the rule itself. The weight of authority provides that the no-profit rule operates within the parameters of the no-conflicts principle. The most familiar support for this position is Lord Upjohn’s dicta in Boardman v Phipps where he stated that the House of Lords in Regal (Hustings) ‘were not attempting to lay down any new view on the law applicable’ and that ‘law is laid down in the fundamental principle exemplified in Lord Cranworth’s2’ statement’ of the no-conflicts principle in Aberdeen v Blaike.22 For this reason Lord Upjohn viewed Regal (Hustings) as ‘an obvious case where the duty of the director and his interest conflicted’.2’ More recently, Jonathan Parker LJ has lent his support to this interpretation of Regal by favourably citing a section of the above quotation from Lord U p j ~ h n . ~ ~ Furthermore, the recent judgment of Arden LJ in Item SofnYure v F a s s i W marks a rejection of attempts to categorise separate and independent duties.26 In this case Arden LJ held that there is not in English law a separate and independent duty for a director to disclose his own misconduct and that judicial references to a duty to disclose should be understood as applications of the duty of loyalty. Furthermore, she notes that the specification of specific duties results in a ‘proliferation ... of arguments about their breadth’.27 That is, the specification of separate rules risks their over- or under-inclusive application.

This article views the no-profit rule as a sub-rule of the no-conflicts principle; an obvious case of its application.28 English law thinks through the no-conflicts approach and in so doing may deploy the no-profits rule. To treat the no-profit rule as a separate, independent rule is, it is submitted, to lose sight of the duty of loyalty, which, as Arden LJ recently held, is the ‘fundamental duty to which a director is subject’. It is also the better reading of Regal (Hustings). The shadow of potential conflict hangs over the decision in Regal (Hustings). Questions about the director’s conduct are begged: could the directors have

21. [I9671 2 AC 46 at 125. See also Upjohn LJ’s judgment in Boulting v Association of Cinematograph Television and Allied Technicians [ 19631 2 QB 606 at 635. 22. Aberdeen Railway v Blaikle (1 854) 1 Macq HL 46 1 at 47 1. 23. [ 19671 2 AC at 124. 24. [2003]BCC711 at721. 25. [200.5] ICR 450. 26. It should be noted, however, that Arden LJ’s suspicion of separate, independent rules may not extend to the no-profit rule given her Ladyship’s judgment in John Taylors vMasons [2001] EWCA 2106 in which she cites with approval Morritt LJ’s judgment in Don King Productions Znc v Warren [2000] 1 BCLC 607 and his approval of Chan v Zucheria (1984) 154 CLR 178. 27. [2005] ICR 450 at 462. 28. Commentators who take this position include: B Pettet Company Law (Harlow: Longman, 2nd edn, 2005) p 168, arguing that in Regal making a profit by reason and in the course of a directorship was ‘sufficient for liability under the no-conflicts rule’; G Moffat Trusts Law: Text and Materials (London: Butterworths, 3rd edn, 1999) p 631, arguing that ‘the primary duty is that a fiduciary may not have a conflict between his personal interest and that of his principal ... As a corollary of that principle, the courts have developed the rule that the fiduciary will be liable to account to the ‘principal’ for any unauthorized profit made by virtue as his position as fiduciary or through use of the principal’s property’ (emphasis added).

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been more forceful in their negotiations with the landlord; why couldn’t bridging finance have been arranged on behalf of the company when there was a high likelihood of a swift exit strategy through the sale of the company? The no-profits rule articulated in Reguf (Hustings) was forged in the context of potential conflict between the directors’ and the company’s interests. The House of Lords’ articulation of the no-profit rule in Regal (Hustings) is an instantiation of the no-conflicts principle. To apply the rule in isolation from the principle risks its over-inclusive application in circumstances where the duty of loyalty would not be implicated. In this regard, commentators have noted, in support of the claim that the no-profit rule should be treated as an independent rule, that it is possible to imagine a hypothetical case where the facts do not involve a conflict of interests but do fall within the no-profit rule.?’ This is, of course, correct. Any rule which becomes, to use Frederick Schauer’s useful terminology, entrenched: applicable in isolation from the principle i t instantiates,30 will be applied in situations which are, vis-L-vis the principle, over- or under-inclusive. It is, however, circular to use an example of a rule’s over-inclusive application to support its entrenchment. If there are circumstances where there is no possibility of conflict but the opportunity was identified by the director by reason and in the course of his directorship, then in such circumstances there is no threat to the duty of loyalty and no reason why the director should not be allowed to keep those profits.

The corporate opportunities framework

The criteria of relevance for the corporate opportunities framework is to whom, as between the director and the company, does the identified opportunity belong; that is, it thinks about an opportunities problem in ownership ternis. Courts in the jurisdictions which have adopted this framework, for example, in most US states, do not think about the opportunities problem through the lens of conflicts rather they ask whether a director has ‘usurped’ an opportunity which ‘belonged’ to the company.3’ Importantly, this ownership framework is not concerned with identifying any absolute property right good against any third party; rather, although the language of property is employed, the corporate

29. Koh. above n 20, at 406. See also Ellas J’s judgment in Notringham University v Fischel [2001] RPC 367 at 401 noting that the no-profit rule ‘overlaps with, but is sometimes wider than, the strict no-conflict of duty and interest rule’. 30. F Schauer Playing By The Rules: A Philosophical Examination of Rule Based Decision Making I n Law and Life (Oxford: Clarendon Press, 1991). Schauer contrasts two modes of decision making. First, a conversational model where if a rule’s application would diverge from its underlying principle (what Schauer calls a justification) the application is corrected to ensure it is compliant with the justification. In this case ‘over inclusiveness would be but a temporary impediment’ corrected by a controlling principle (p 48). Second, an entmchment model where the rule not its justification ‘control[s] the decision even in those cases in which that generalization [the rule] failed to serve its underlying justification’ (p 49). In this model, over- and under-inclusiveness are inevitable (p 35). 31. For example, in Re Digex, Inc Shareholders Litigation 789 A 2d 11 76 at 1 188 (Del, 2000) the Delaware Chancery Court’s task was to ‘evaluate the plaintiffs claim that the defendants have usurped a corporate opportunity belonging to Digex’.


opportunity doctrine deals in rights that are more like personal rights as between the director and the c~mpany . ’~ The words ‘belonging’ or ‘property’ in this context are proxies for a very different set of legal rights in relation to opportunities than they are in relation to say real estate or plant and machinery. However, as these rights relate to an attachment to an ‘object’ such as an opportunity and as they allow the ‘owner’ of that object, for example, the company, to exclude other parties, in this case directors, from using that object, they have an intuitive commonality with the idea or logic of property. It is in this sense that the corporate opportunities doctrine applies the language of property and ownership to opportunities that are not, in any traditional sense, the company’s property.

However, an ownership framework for thinking about the opportunities problem tells us little about the criteria for determining or distributing these property-type rights. The framework requires instantiating rules. Regarding the nature of these rules, the US experience, whereby different states have different rules to effect a corporate opportunities approach,” teaches us that there is no determinate relationship between the corporate opportunities approach itself and any instantiating rules and, as with the no-conflicts framework, no determinate relationship between the corporate opportunities approach and either strict or flexible regulation. Whilst it is true that the corporate opportunity doctrine is often associated with certain types of rules, for example, whether or not the opportunity is in the company’s line of business, and that many US states employ similar rules drawing at times on other states’ jurisprudence, there is sufficient variation clearly to demonstrate the absence of any necessary connection between the framework and particular rules.

The state of Delaware is the market leader in the US for incorporations and corporate law. Delaware determines whether or not an opportunity ‘belongs’ to the company through several considerations which were set forth in the leading case of Guth v Loft,34 which include: whether or not the opportunity is in the company’s line of business; whether or not the company has an interest or a reasonable expectancy in the opportunity; whether it was financially capable of exploiting the opportunity; whether the opportunity was identified

32. In Graham v Mirnms 11 1 I11 App 3d 751 at 762 (111, 1982). the Appellate Court of Illinois held that ‘the corporate opportunity doctrine prohibits a corporation’s fiduciary from taking advantage of business opportunities which are considered as “belonging” to the corporation (at least as far as thefiducia? is concerned)’. In Re Trim-Lean Meat Products, Inc 4 BR 243 at 247 (Del, 1980) with regard to the corporate opportunities doctrine the court noted that ‘it essentially treats a corporation’s expectations regarding certain business opportunities which are in the corporation’s line of business and of practical advantage to it as corporate property which may not be appropriated for personal gain’ (emphasis added) (cited in Rapistan Corpn v Michaels 203 Mich App 301 at 3 15 (Mich, 1994) (applying Delaware law). 33. Corporate law in the US is state-based law. Each corporation is subject to the corporate law of the state in which it is incorporated. Certain aspects of corporate life are regulated by federal statutes such as the Securities Exchange Act 1934, but the internal governance of a corporation, including directors’ duties and opportunities regulation, is for the most part a matter for state law. 34. 5 A 2d 503 (Del, 1939).

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by the director in her personal or professional capacity; and, where the director encounters the opportunity in a personal ~apacity,’~ whether the opportunity was essential to the company..” Interestingly, included in this list of rules which determine ownership is also whether in embracing the opportunity the director’s self-interest is brought into conflict with the corporation’s interest. That is, the conflicts test is one aspect of Delaware corporate opportunities doctrine’s determination of belonging. In practice, however, this aspect of the test is either not considered” or is a direct function of the findings under the other tests, which take priority in application.3x

Delaware’s approach to the corporate opportunities doctrine has been very influential on other states. There remains, however, considerable variation in both the formal rules and in their interpretation and application. Some states, for example, elevate the line of business test as the central consideration.3g Several other states prioritise the idea of fairness in the determination of belonging, In Maryland, the courts ask whether ‘in fairness’ the opportunity belongs to the corporation.4o In North Carolina the courts ask whether the taking of the opportunity by the director was just and ~easonable.~’ Where a rule appears similar in two or more jurisdictions closer attention to their interpretation and application reveals considerable variation in the nature of the rule. For example, in Delaware, in relation to the ‘interest and expectancy’ test, the courts have looked to whether there was ‘some tie’ between the companies business and the opportunity.‘* In one of the earliest US

35. In Curb 11 Loft 5 A 2d 503 (Del, 1939) the Delaware Supreme Court set forth a slightly modified test where the director encountered the opportunity in his personal capacity, namely that the opportunity is not essential to the company, that it does not have any interest or expectancy in the opportunity and that the company’s resources were not used in pursuing the opportunity. This is known as the Guth Corollary. 36. Guth v h f t 5 A 2d 503 at 5 I 1 (Del, 1939). See further, Johnston v Greene 121 A 2d 919 (Del, 1956); and Broz v Cellular Information Systems, Inc 673 A 2d 148 (Del, 1996). 37. See, for example, Schreiber v Bryan 396 A 2d 512 at 519 (Del, 1978) summarising the ‘essential ingredients to finding that a corporate opportunity has been usurped’ without reference to the conflicts test. In Miller v Miller 301 Minn 207 (Minn, 1974), the Supreme Court of Minnesota conducting a review of the various corporate opportunities rules deployed in US states, including Delaware, identified three rule-themes, namely, the interest and expectancy test, the line of business test and the fairness test. The Guth Corollary does not refer to the conflicts test: see, for example, Johnston v Greene 121 A 2d 919 (Del, 1956); Rapistan v Michaels 203 Mich App 301 (Mich, 1994). 38. Where referred to the conflicts issue receives limited direct attention in the legal analysis, rather it seems that if a director takes an opportunity that falls within the line of business, expectations and financial capacity tests then it follows automatically that his self-interests conflict with the interests of the company. See, for example, Broz v Cellular Information Systems, Inc 673 A 2d 148 (Del, 1996) where conflicts issues are considered; however, the determination of conflict is clearly a direct function of the prior tests (at 157). This is, perhaps, unsurprising if one understands the line of business, expectations and financial capacity tests as trying to identify whether or not the company would actually be interested in the opportunity. 39. Graham w Mirnms 1 I 1 Ill App 3d 751 at 766 (Ill, 1982). 40. Independent Distributors v Katz 99 Md App 441 at 457 (Md, 1994). 41. Meiselman ~Meise lman 309 NC 279 at 310 (NC, 1983). 42. See. for example, Johnston v Greene 121 A 2d 919 at 924 (Del, 1956).


opportunities cases, Lagarde v Anniston Lime & Stone the Louisiana Supreme Court adopted an interest or expectancy test that focused on whether or not the company had any actual property or contractual right in the disputed opportunity. In New York the courts have focused on the degree of likelihood that an opportunity would be realised by the company.44

III. THE CORPORATE OPPORTUNITIES FRAMEWORK IN ENGLISH LAW

English law has traditionally approached the opportunities problem though the no-conflicts framework. Whilst the functional outcome of applying the no- conflicts approach is to distribute qualified ownership of the opportunity as between the director and the company, this is an indirect corollary of the law’s focus upon avoiding possible conflicts of interest that compromise loyalty. English law, when it thinks through the no-conflicts framework, does not think about the opportunities problem in ownership terms. It does not ask whether the opportunity ‘belongs’ to the company, whether it has been ‘usurped’ by the director, whether this is or is not the company’s opportunity or whether an opportunity is a corporate opportunity. In the recent case of Bhullar v BhullaP the Court of Appeal makes this explicit. In determining whether the director was in breach of his fiduciary duty Jonathan Parker LJ applied the no-conflicts principle and explicitly rejected the question of whether the opportunity ‘belonged’ to the company or whether the company ‘had some kind of beneficial interest in the opportunity’.

This position, however, is inconsistent with the wording of the codification of English law’s approach to the opportunities problem as proposed by the CLR’s Final Report and adopted in Principle 6 of the government’s White Paper on Modernising Company Law. Principle 6 adopted a corporate opportunities framework by prohibiting a director using any information or property ‘of the company’ and using an opportunity ‘of the company’ which he became aware of whilst carrying out his functions as a director. The prohibition set forth in Principle 6 is limited to information, property and opportunities that are ‘of the company’ and, by implication, would not apply to information, property and opportunities that are not ‘of the company’. Whilst information and opportunities are distinguished from property, the proposed draft codification employed the logic of ownership to information, property and opportunities. That is, opportunities and information are treated ‘as if‘4h they belonged to the company. Importantly, however, neither the CLR, the Modernising Company Law White Paper nor the Company Law Reform White Paper which replaced

43. Lngarde v Anniston Lime & Stone Co 126 Ala 496 (La, 1899). 44. Abbott Redmorit Tliinlite Corpn 1’ Redmont 475 F 2d 85 (1973). 45. [2003] BCC 7 I 1 at 720. 46. Regarding Principle 6, P Koh ‘Principle 6 of the Proposed Statement of Director’s Duties’ (2003) 66 MLR 894 at 896 notes that ‘information, for the purposes of the corporate director’s obligations of loyalty, is to be treated as if it was property’. For Koh, Principle 6 treats information like property as it is juxtaposed next to the ‘property ... of the company’ (at 895). In contrast, this article looks to the preposition ‘of‘ for the relationship of belonging between information, opportunities and the company.

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Principle 6 demonstrate an awareness of the implications of and the relationship between an ownership framework and English opportunities case law. The conceptual framework of ownership has moved in and out of the reform debate without a considered awareness of the implications of using or rejecting this language.

This section shows how the qualified nature of ownership in a corporate opportunities framework and its indeterminate relationship to instantiating rules rendered Principle 6 unworkable. Importantly, however, the interpretations of Principle 6 which this analysis generates enables a re-evaluation of the use of an ownership framework in English opportunities case law; the extent to which English law has its own corporate opportunities doctrine.

Making sense of Principle 6’s corporate opportunities framework

Principle 6’s adoption of a corporate opportunities framework rather than a no-conflicts framework could plausibly be interpreted in two different ways. The first available interpretation is that the use of corporate opportunities language is not intended to signify a change of substantive framework and/or of the rules to be employed to instantiate that framework. According to this interpretation the introduction of corporate opportunities language reflects the tendency of some commentators to refer to the no-conflicts approach under the umbrella term corporate opportunities and to interweave a discussion of the no-conflicts approach with the functional outcome of its application, namely the distribution, as between director and company, of the entitlement to attempt to exploit the opportunity. For these commentators the English corporate opportunities doctrine is the no-conflicts approach. Dan Prentice and 3ennifer Payne refer to English law’s opportunities regulation as ‘the corporate opportunity doctrine’.47 Paul Davies, for instance, before considering the leading cases of Regal (Hustings), Boardman v Phipps and IDC v Cooky notes that a consequence of the no-conflicts principle is that the directors must not ‘without the informed consent of the company, use for their own profit the company’s assets, opportunities or information’.4a Sarah Worthington has argued that an earlier draft of Principle 6 describes the ‘corporate opportunity doctrine’, although it ‘restates the doctrine in an orthodox fashion’. Further, she argues that ‘the proposed statement does nothing to assist the courts in resolving the perennially difficult issue of whether an opportunity is “the company’s’’ or not’.4v Where these commentators use the designation ‘corporate opportunities doctrine’ they are refemng to the English no-conflicts tradition and not to a different way of approaching the opportunities problem. Where these commentators use the language of ownership or property it is used to describe what the law does in fact: the outcome of its application, not how English law actually approaches or thinks about a specific opportunities problem.

47. D Prentice and J Payne ‘The Corporate Opportunity Doctrine’ (2004) I20LQR 198 at 198. 48. P L Davies (ed) Cower and Davies: The Principles of Modern Company Law (London: Sweet & Maxwell, 7th edn, 2003) p 416. The section in which these cases are considered is entitled ‘Use of Corporate Property, Opportunity or Information’. 49. S Worthington ‘Reforming Director’s Duties’ (2001) 64 MLR 439 at 452.


Principle 6 could be understood in these terms: a readily accessible statement of what the law actually does rather than an attempt to alter either the law’s approach to the opportunities problem or its instantiating rules. To use the terminology of the government’s recent consultation paper on Flexibility and Accessibility, the use of corporate opportunities language in Principle 6 would merely serves as a ‘restatement’, that is ‘rewording and/or rearranging the law in order to simplify it, in the sense of making it easier for modern users to find the provision that effects them and to understand it’, as contrasted with a ‘reform’, which involves ‘any kind of amendment to the existing law which changes its effect’.50

Support for this interpretation is available from the CLR consultation document Developing the Framework, where the opportunities problem is stated through a corporate opportunities framework with no indication that the CLR thought this involved any departure from how English law has traditionally thought about the problem.51 In the CLR’s Final Report, the discussion of Principle 6, in contrast to Principle 6 and the explanation accompanying Principle 6,52 uses a no-conflicts framework. There appears to be no sense that the CLR is mixing its frameworks.

For scholars who contrast English law with the US corporate opportunities doctrine this interpretation does not make any sense. The English no-conflicts approach has never referred to itself as the ‘corporate opportunities doctrine’ or used the proprietary label ‘corporate opportunities’ .53 For these scholars the corporate opportunities framework and the label ‘the corporate opportunities doctrine’ are associated with a US approacVJ which focuses on ownership of

50. Company Law: Flexibili~y and Accessibility Consultation (2004) p 9, available at www.dti.gov.uk/cld/pdfs/powerscondoc-finaLpdf (last checked 4 May 2005). 51. Modern Conrpany Law for a Competitive Economy: Deve/oping the Framework URN 001656, p 39: ‘the second area in which a conflict of interest issue arises is where the director uses or exploits an asset including a business opportunity, which is properly treated as belonging to the company, for his own purposes.’ 52. Section 3.21 of the CLR Final Report is entitled ‘Personal Exploitation of Corporate Opportunities’ and notes, in no-conflicts terms, that ‘the key issue we need to address here is the process for addressing director’s conflicts of interest and in particular which company body ... should have the authority to permit a director to exploit for his personal benefit ... which he has encountered as a director’ (p 46, emphasis added). Annex C: Statement of Directors’ Duties - Draft Clause and Schedule and Explanatory Notes: ‘Paragraph 6 (Personal Use of the Company’s Property, Information or Opportunities) covers the so called “corporate opportunity rule” which prevents a director from exploiting company assets for his personal purposes’ (emphasis added). 53. Corporate opportunity is a proprietary concept, which, interestingly, a Lexis search reveals was first used in English case law in Island Export Finance v Llrnniunn [ 19861 BCLC 460, an English corporate opportunities case considered in this article (see below, text to nn 79-84). 54. For example, Lowry and Edmunds note that ‘for over 60 years the United States courts have been developing what has become compendiously known as the ‘corporate opportunity doctrine’: J Lowry and R Edmunds ‘The No-Conflict - No-Profit Rules and the Corporate Fiduciary: Challenging the Orthodoxy of Absolutism’ (2000) JBLl22 at 123. Austin, above n 20, p 141 argues that ‘over the last century or so. United States courts have developed a supplementary rule for the fiduciaries of business corporations, called “the corporate opportunities doctrine”’.

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information and oppor tuni t ie~~~ through a set of rules that are distinct from English law’s no-conflicts approach. Accordingly, to adopt the corporate opportunities approach would require the specification of a set of different instantiating rules. It is, therefore, inexplicable that Principle 6 does not specify such rules. Struan Scott, for example, argues that Principle 6 adopts the language of property ‘without giving guidance as to exactly when the opportunity is considered to be the company’s’.S6 With regard to the concept of ‘information’ used by Principle 6, Pearlie Koh submits that:

‘Principle 6 does not attempt to delineate or confine the categories of information that could potentially fall within its embrace. Surely, to introduce the idea of information as property is to require, dictate even, that some boundary be drawn to segregate information that may properly said to belong to the company, and information that does not.’S7

However, as the experience of the corporate opportunities doctrine in the US outlined above demonstrates, there is no necessary connection between any set of instantiating rules and the corporate opportunities framework. Accordingly, it would be perfectly consistent with the corporate opportunity framework to employ the no-conflicts approach to determine ownership as between director and company of an opportunity or information. That is, where a director’s exploitation of an opportunity or information would result in a conflict or possible conflict between the director’s interests and the company’s interests the opportunity or the information belongs to the company.

Although the corporate opportunities framework can accommodate the no- conflicts approach as the criteria of ‘belonging’, the second available interpretation of Principle 6’s reliance upon a corporate opportunities framework is that the adoption of a new framework is a conscious decision to refer to a different set of common law rules which are associated with this framework.sx This interpretation is intuitively persuasive: if the law is set forth in terms that bear limited resemblance to the law’s dominant approach, then surely the reformers must have had something else in mind. Accordingly, whilst it is clear that the dominant mode of thinking about the opportunities problem in English law is through the no-conflicts framework, it is important to determine whether English law has any tradition of thinking through a corporate opportunities framework and, if so, whether such an approach is accompanied by a set of distinct rules.

55. Koh, above n 20, at 41 1 noting that ‘in the United States, the corporate opportunities doctrine regulates circumstances under which a business opportunity is considered a corporate asset’. See also Austin, above n 20, p 153. 56. S Scott ‘The Corporate Opportunity Doctrine and Impossibility Arguments’ (2003) 66 MLR 852 at 857. 57. Koh, above n 46, at 896. 58. Prentice and Payne, for example, above n 47, at 202 seem to draw such an inference when arguing that ‘Principle 6 is very much a maturing business opportunity test’, one of two possible English corporate opportunity approaches discussed below. Koh, above n 46, at 897 noting that ‘the reference in principle 6 to “opportunity of the company” is generally taken to refer to the “corporate opportunity doctrine”’. 59. Koh, above n 46, at 900.


In this regard, some commentators have argued that, in contrast to the US, ‘there is no discernibly distinct and sufficiently developed corporate opportunity doctrine that is capable of c~di f ica t ion’~~ in the UK to which the CLR could have referred when drafting Principle 6. This article takes issue with this claim and argues that there are in fact two distinct ways in which English law thinks about the opportunities problem through a corporate opportunity framework. The first of these corporate opportunity approaches is found in the late nineteenth century Court of Appeal judgments in Aas v Benham and Dean v MacDowell, which were drawn upon by several of their Lordships in Boardman v Phipps. The second of English law’s corporate opportunity approaches is of more recent vintage and is provided by familiar first instance decisions addressing the taking of opportunities by former directors.

Revisiting Boardman v Phipps

Whether information, including information about opportunities,‘” can properly be described as the property of a company is a source of some confusion in English law. Authority is available both for and against the proposition that information is the company’s property.h’ Most commentators argue that it should not be so described.h2

60. As Pearlie Koh insightfully points out the distinction between information about an opportunity and an opportunity is unclear and the reliance in Principle 6 on this distinction is problematic (Koh, above n 46, at 897). An opportunity is always in the first instance information about an opportunity. As Morritt LJ in Brown v Bennett [ I9991 1 BCLC 649 points out the presentation of an opportunity ‘forms knowledge’ for the directors. Intuitively the idea of an opportunity suggests progression towards the realisation of the information about the opportunity. But until a contract is awarded or an investment made, it is difficult to distinguish between the earlier and later stages of the development of the initial information. But the distinction in Principle 6 assumes that such a distinction can be made because it assumes the opportunity exists in a way distinct from information prior to it being ‘used’ by the director. However, prior to its ‘use’ an opportunity is always information and knowledge. It does not make sense, therefore, to regulate ‘opportunities’ differently than ‘information’. 61. On confidential information see generally Lord Goff and G Jones The Law. of Restitution (London: Sweet & Maxwell, 6th edn, 2002) pp 754-756. Authority for the proposition that confidential information is property include: Re Keene [ 19221 2 Ch 475 where the Court of Appeal held that an unwritten formula was ‘property’ as understood by the bankruptcy Acts; A-G v Guardian Newspapers Ltd [ I9891 2 FSR 8 I at 99-100 where Sir Nicholas Browne-Wilkinson, whilst equivocal about his own view and its consistency with Boardman v Phipps, held that although ‘information as such is not property in any sense’, if it is communicated in such a way as to generate a duty of confidence this may create a property right in the information. Authority for the proposition that confidential information is not property include: Donaldson J’s decision in North and South Trust Company v Berkeley [ 19701 2 Lloyd’s Rep 467 at 48 1 noting that ‘it is by no means clear that information is property in this context’; and Lord Denning MR’s judgment in Fraser v Evans [ 19691 1 QB 349 at 36 1 where he held that any restraints on the publication of confidential information were ‘based not so much on property or on contract as on the duty of good faith’. 62. For a summary of this commentary see T K Leng and S H S Leong ‘Contractual Protection of Business Confidence’ (2002) JBL 51 3 at 521.

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Although Boardman v Phipps is the leading authority on the application of the no-conflicts principle, it is also the leading, if somewhat confused, authority on the relationship of opportunity-related information to the concept of property. In this case Boardman and Phipps, who were considered to be fiduciaries of a trust, bought shares in a company in which the trust held a minority shareholding. This acquisition of the shares together with the trust’s minority interest gave Boardman and Phipps effective control of the company. This enabled them to restructure the company and by doing so engineered substantial value for both the trust and themselves. The information which Boardman and Phipps used to evaluate the company was obtained in their capacity as fiduciaries to the trust and the question arose as to whether this information should be treated as the property of the trust, together with any profits arising from its use by the fiduciaries. In this regard Lord Hodson ‘dissented from the view that information is of its nature something which is not properly to be described as property’63 and held that the ‘confidential information acquired in this case ... can properly be regarded as the property of the trust’. Lord Guest held that there was ‘no reason why information and knowledge cannot be trust property’ and, further, that all information the fiduciaries obtained by acting on behalf of the trust ‘became trust property’.” Lord Guest did not limit the application of this holding to confidential information. For Viscount Dilhorne, while he accepted that ‘some information and knowledge can properly be regarded as property’, the information obtained by the fiduciaries in this case was ‘not property in the same way as shares held by the trust were its property’.6s For Lord Cohen, information ‘is not property in the strict sense of that word’.66 Lord Upjohn strenuously dissented from the position that information, including confidential information, is the property of the company. Although he acknowledged that confidential information is often described in property terms, it was, he argued, not ‘property in any normal sense’.67

Scholarly commentary on the information as property debate has tended to agree with and arguably overweight Lord Upjohn’s judgment. Austin, for example, notes that ‘Lord Upjohn’s objections are unanswerable’.h8 The problem, however, is that there are two different ways in which the language of property is being used by their Lordships. The first way represented by Lords Hodson, Guest and Upjohn focuses upon the traditional or, as Lord Upjohn puts it, ‘normal’ sense of the word, that is a reference to something in relation to which a person has a right good against all third parties in the same way as a company would own shares or real estate. This is what Lord Upjohn objects to: it seems absurd that information which ‘is normally open to all who have

63. [1967]2AC46at 107. 64. [ 19671 2 AC 46 at 115. 65. [ 19671 2 AC 46 at 90. 66. [I9671 2 AC 46 at 102. 67. [I9671 2 AC 46 at 128. 68. Austin. above n 20, p 145. See also Koh, above n 46, at 896 foregrounding Lord Upjohn’s dissenting judgment in considering this issue; Koh above n 20, at n 108; and G Jones ‘Unjust Enrichment and the Fiduciaries Duty of Loyalty’ (1968) 84 LQR 472 at 484-485.


eyes to read and ears to hearlbY could be subject to absolute ownership rights of a trust merely because its fiduciaries’ eyes and ears encountered the information. The concept of property, however, is very malleable. The concept of itself does not determine the nature of the rights created in relation to this infom~ation:’~ it signifies a relationship of ownership although that relationship can be qualified in many different ways. As detailed above, the corporate opportunities doctrine used in many of the states in the US uses the logic and language of property and ownership but it is clear that this is a qualified form of ownership between only the director and her company. Viscount Dilhorne and, arguably, Lord Cohen understand how property can be used in this qualified sense when talking about opportunities information. Here it is not property in the strict sense or like shares are property, rather through this lens there is a property-type relationship between only the fiduciary and the trust or the director and the company in relation to that information. This is the second sense in which property is used in Bonrdnzan v Phipps: a corporate opportunities sense. However, the debate about the first sense has drowned out consideration of the second corporate opportunities sense and, importantly, consideration of the cases that originally employed it, namely Aas v Benham and Dean v MacDowell. These cases, which were central to Viscount Dilhorne’s analysis in Boardman v Phipps, offer a foundation upon which an English corporate opportunities doctrine could be built.

In Aas v Benham, Mr Benham had used information obtained by him as a member of the plaintiff partnership, a ship broker, in advising a separate firm, the Barrow Ship Building Company, on their reorganisation. The information related to how a company could best position itself to obtain potential shipbuilding contracts for warships from the Spanish and Portuguese governments. The partnership’s ship broking business included bringing together buyers and builders of ships and they had acquired this information through their attempts to act as broker in relation to these warship contracts. Based upon this information the defendant advised the Barrow Shipbuilding Company to reorganise itself so as to position itself for these contracts. Mr Benham’s partners brought an action for an accounting of profits arising from his relationship with the Barrow Shipbuilding Company. The court of first instance in ordering an accounting of profits held that the reorganisation of the Barrow Ship Building Company would not have taken place in the form it had but for the information about the warship opportunity. The Court of Appeal, applying an earlier Court of Appeal judgment in Dean v Macdowell, reversed this decision. Importantly, the court applied an ownership framework in addressing this case.

In Dean v Macdowell, Cotton LJ held that if a partner ‘makes any profit by the use of any property of the partnership, including, I may say, informarion which the partnership is entitled to, there the profit is made out of the partnership property, and therefore, of course, i t must be brought into the

69. [1967] 2 AC 46 at 127. 70. Goff and Jones, above n 61, p 755 make a similar argument in relation to the regulation of confidence when they note that ‘to categorise information as property does not necessarily solve satisfactorily such complex questions as the scope of a duty of a confidant or a third person to make restitution’.

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partnership account’ (emphasis added).” In Aas v Benham, Bowen LJ considered the relationship between entitlement and information as set forth in Cotton LJ’s judgment in Dean v Macdowell:

‘He [Cotton LJ] was speaking of information to which the partnership was entitled in the sense in which they are entitled to property ... He is speaking of information which the partnership is entitled to in such a sense that it is information which is the property, or is to be included in the property of the partnership - that is to say, information the use of which is valuable to them as a partnership, and to the use of which they have a vested interest (emphasis added).’72

As with the corporate opportunities framework, Aas v Benham focuses on the logic of property, that is the creation of qualified ownership rights between fiduciary and firm in the information as if the information were property. Bowen LJ refers to entitlement ‘in the sense’ in which it is property. As the information about the shipbuilding opportunity was available to any party who heard about the opportunity there could be no absolute property right in the information. However, between the partner and the partnership there could be rights to information and the proceeds of such information which are akin to the structure of property rights.

The question for the court in Aas v Benham and Dean v MacDowell was how to determine in what circumstances the partnership would be entitled to this information as if it were the property of the partnership. For both Lindley LJ and for Bowen LJ, following Cotton LJ in Dean v MacDowell, the determinant of the qualified entitlement to information was whether the information was used within the agreed scope of the partnership’s activities. Lindley LJ held that ‘by “information which the partnership is entitled to” is meant information which can be used for the purposes of the partnership’. A partnership’s purposes were determined by what was ‘within the scope of the partnership business’ and, importantly, ‘there is no principle or authority which entitles a firm to benefits derived by a partner from the use of information for purposes which are wholly without the scope of the firm’s business’.73 For Lindley LJ and Bowen LJ, as the promotion and reconstruction of companies were not part of the partnership’s existing business,74 the information was not used for a purpose within the scope of the partnership business and, accordingly, the partnership was not entitled to any proceeds arising from the use of the information.

Importantly, this scope of business test to determine entitlement is not a function of the nature of the information per se, rather it is a function of the use to which the information is put. If a director obtains information about an opportunity which is within the company’s scope of business and exploits it personally then, applying the scope of business test, the company would have

71. [ 18761 8 Ch D 345 at 354. 72. [ 18911 2 Ch 244 at 258. 73. [ 18911 2 Ch 244 at 256. Interestingly, in giving an example of when a partner could use information for personal benefit, Lindley LJ also uses the phrase ‘line of business’ (at 256). 74. For Lindley LJ ‘all such matters were quite foreign to [the partnership’s] business’ [ 18911 2 Ch 244 at 255.


an entitlement to the opportunity as well as any resulting profits. In such a case, exploiting the opportunity necessarily uses the information for a purpose that is within the company’s scope of business. However, if a director during the course of his tenure with a company obtains information which reveals that the industry in which the firm operates is in decline, if, relying on this information, he advises another company to go into a different area rather than into that industry then any profits he makes from such advice would not be for the account of the company.

In Boardman v Phipps, Viscount Dilhorne, in addressing the issue of whether information is property, held that ‘Aas v Benham throws some light on this question’.75 He then referred to the sections of Lindley LJ’s and Bowen LJ’s judgments quoted above. Further, he held that the principles set forth in A m v Benham apply to other agents and to trustees. Viscount Dilhorne applied Lindley LJ’s scope of business test concluding that the purchase of the shares by Boardman and Phipps was not within the scope of the trust. Lord Hodson also refers favourably to Aas v Benham and to Bowen LJ’s judgment in Aas v B e n h ~ m . ~ ~ Wilberforce J in the first instance decision also relied upon Lindley LJ’s approach in determining whether ‘the knowledge of which profitable use was made can be described as the property of the trust or

Whilst Lord Denning MR in the Court of Appeal does not rely directly on Aas v Benham he considered Wilberforce J’s determination that the information was the property of the trust to be decisive in holding Boardman and Phipps to account.78

Since Boardman v Phipps, however, there have been no further references to or attempts to rely upon Aas v Benham. This is surprising given that the scope of business test was referred to by three of their Lordships, directly relied upon by two Law Lords and not disapproved of by any of them, and that Lord Hodson, Viscount Dilhorne and Wilberforce J thought its approach of relevance beyond the partnership sphere. The reason for this seems to be that English law and commentary is conceptually stuck at the level of is information company property or not? For Aas v Benham, however, the use of the language of ownership was merely descriptively and intuitively useful as a label for a set of rights that are very different from those rights we commonly associate with property. What really mattered were the rules that determined the parties’ rights and their entitlements. The scope of business test employed in Aas v Benham is easily understandable by those whose lives it affects and, as argued below, substantively and epistemologically consistent with the no-conflicts approach. It is unfortunate, therefore, that conceptual inertia has got in the way of its development.

The maturing business opportunity test

In recent first instance decisions addressing opportunities exploited by former directors following their resignation as directors, English law has again

75. [ 19671 2 AC 46 at 90. 76. [I9671 2 AC 46 at 109-110. 77. [1964] 1 WLR993at 1011. 78. [I9651 Ch 992 at 1019.

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demonstrated its capacity to think about the opportunities problem through a corporate opportunities framework. It has, however, done so through markedly different determinants of belonging than the ‘scope of business’ test set forth in Aas v Benham.

The two most important cases in this regard are Island Export Finance Ltd v Umunna” and CMS Dolphin v Simonet.so In Island Export Finance, Mr Umunna, the Managing Director of Island Export Finance Ltd, who had been instrumental in obtaining a prior order from the Cameroon postal authorities for postal caller boxes, resigned his position citing dissatisfaction with the company and with the way in which he was being treated. Following his resignation, Mr Umunna secured two further orders from the Cameroon postal authorities. The plaintiff company sued Mr Umunna claiming breach of fiduciary duty and an accounting of the profits made from the subsequent orders. In CMS Dolphin v Simonet, the defendant, following the effective breakdown of his relationship with his co-investor, resigned both as an employee and as a director of CMS Dolphin, an advertising agency, and set up a similar business with a third party. The claimant alleged that the defendant had diverted certain business opportunities from CMS Dolphin to his new business. The opportunities included actual contracts for the provision of advertising services and client relationships.

In both Island Export Finance and CMS Dolphin the court placed considerable reliance on the approach developed by the Canadian Supreme Court in Canadian Aero v O’Mal le~ .~‘ In this case the former President and a former director of Canadian Aero resigned from the company prior to entering into, through a newly incorporated company, a contract with the government of Canada for the topographical mapping of Guyana. Canadian Aero had been pursuing this opportunity for some years prior to the defendants’ resignations. In holding the directors liable to account for their breach of fiduciary duty the Supreme Court blended the no-conflicts prohibition with a corporate opportunities framework, holding that the fiduciary relationship required that a fiduciary could not ‘obtain for himself ... any property or business advantage either belonging to the company or for which it has been negotiating’.82 That this approach is based upon an ownership framework was confirmed by Collins J in CMS Dolphin who held that ‘the underlying basis of the liability of a director who exploits after his resignation a maturing business opportunity of the company is that the opportunity is to be treated as ifit were the property of the company in relation to which the director had fiduciary duties’ (emphasis added).”

To determine ‘belonging’, the Canadian Supreme Court held that a director could not usurp for himself ‘a maturing business opportunity which his company is actively pursuing’x4 and that a former director could not do so if his resignation was motivated by a desire to acquire the opportunity. No test of what amounts to a ‘maturing business opportunity’ is laid down. However,

79. [ 19861 BCLC 460. 80. [2001] 2 BCLC 704. 81. [ 19741 SCR 592. 82. [ 19741 SCR 592 at para 24. 83. [2001] 2 BCLC 704 at 733. 84. 119741 SCR 592 at para 25.


the Canadian Supreme Court makes it clear that the court must consider a broad range of possible factors, including, for example, the nature and ripeness of the opportunity, the office held by the fiduciary, as well as the fiduciary’s relationship to and knowledge of the opportunity. Importantly, the referenced factors are not exhaustive. The court notes that the need for flexibility in this area of the law means that it would be ‘reckless’ to provide an exhaustive list of factors.

Both Hutchinson J in Island Export Finance and Collins J in CMS Dolphin found that the principles set forth in Canadian Aero represented English law. Hutchinson J opines that the Canadian Supreme Court was ‘consistently applying the principles laid down in the line of authorities of which Regal (Hustings) v GuEliver is an example’ and applying these principles found that the post-resignation postal caller box orders were neither maturing business opportunities nor was the company actively pursuing them. In contrast, in CMS Dolphin, Collins J found that as the defendant had in effect taken existing contracts he had taken maturing business opportunities.

In Bhullar v Bhullar, Jonathan Parker LJ appears to have put a stop to any pretensions that the maturing business opportunity test has application beyond the post-resignation setting by rejecting the submission that the ‘relevant question’ was whether the company ‘had some kind of beneficial interest in the opportunity’. It is distinctly possible that this holding effectively overrules the application of the maturing business test in the post-resignation setting as well. However, its rejection is based upon the same misunderstanding about the role of the language in opportunities regulation that, as argued above, has inhibited the understanding and development of the Aas v Benham scope of business test. The language of property in the opportunities setting is not concerned with an actual legal or beneficial interest in a specific asset. It is simply a label for a set of rights as between director and company. The label is unimportant. What is important is the rules that determine who, as between the director and the company, gets to benefit from that label.

The doctrinal integrity of the English corporate opportunities doctrines As noted above, English law’s no-conflicts approach is understood by most commentators to provide a strict approach to the regulation of corporate opportunities. What is meant by strict is that it places very broad restrictions on the extent to which a director can personally exploit an opportunity encountered during the course of her tenure. Strictness is a function of the court’s understanding of the breadth of a company’s interests with which a director’s interests can conflict and a function of the courts’ resistance to considering certain facts that indicate that i t would be unfair not to allow the director to keep the opportunity and its profits. Examples of such fairness facts include that the director acted at all times in good faith or that the company was incapable of exploiting the opportunity in any event due to financial or other reasons, or that the board had considered and rejected the opportunity. In Bhullar v Bhullar, for example, the fact that the company was deadlocked and that the claimant shareholders had given notice at board level that they were no longer interested in acquiring investment properties through the company did not effect the court’s determination that a possible conflict existed.

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As Jonathan Parker LJ noted: ‘whether the company could or would have taken that opportunity, had it been made aware of it, is not to the point.’85

English law’s rejection of the relevancy of these fairness facts is acorollary of its scepticism about whether such facts are accessible at all through judicial investigation. This is seen most clearly in the majority’s decision in Boardman v Phipps. In this case, the trust did not have the power to purchase the shares without court approval, the trustees testified that they did not have any intention of purchasing the shares on behalf of the trust, and all the Law Lords held that Boardman and Phipps had acted in good faith. Nevertheless, a majority of their Lordships held that Boardman and Phipps must account for the profits which they made from the transaction as there was a possibility of a conflict of interest and duty. The possible conflict of using information obtained in a fiduciary capacity for personal benefit was not dissolved by the evidence that the trust had no interest in purchasing the shares. The possibility that the interests of the fiduciaries conflicted with the interests of the trust undermined the factual claims made by both interested and uninterested parties. Lord Cohen, for example, was concerned about Boardman’s ability, as solicitor to the trust, to give ‘unprejudiced advice’ if consulted by the trust. Indeed, the Law Lords concerns are well founded. Behavioural psychology teaches us that conflicted parties, even those who believe that they act honestly and in good faith, cannot trust themselves to give impartial advice.86 Where self-interest is not aligned with an objective such as loyalty, actions ostensibly taken pursuant to such an objective are likely to be unconsciously skewed in favour of self-interest. This inability to give unprejudiced advice renders the uninterested trustees account of the record suspect. The active trustee was likely to defend and believe in any decision he took regarding the shares in the company. That decision, however, may have been formed by partial advice. The internal momentum of a decision coupled with pride, professional identity and personal loyalty are likely to result in resistance to any attempt to revisit that decision and to acknowledge any influence of the conflicted fiduciaries’ personal interests.

The corporate opportunities doctrine set forth in Aas v Benham is consistent with the Law Lords’ principled rejection of fairness facts. The determination of what is within the company’s scope of business can be made with limited judicial investigation and can be made without reference to facts that are produced by, within the control of or influenced by the conflicted director. What the company does, what products it produces and what services it offers are facts that have no direct connection to the discovery and exploitation of the opportunity. Of course, the determination of future business areas is more problematic if reliance is placed upon internal corporate documents such as

85. [2003] BCC 71 1 at 723. 86. See M Bazerman, K Morgan and G Lowenstein ‘The Impossibility of Auditor Independence’ (Summer 1997) Sloan Management Review at 91, arguing that: ‘when people are called upon to make impartial judgements, those judgements are likely to be unconsciously and powerfully biased in a manner that is commensurate with self-interest ... People tend to confuse what is personally beneficial with what is fair or moral.’ See generally G Lowenstein ‘Behavioural Decision Theory and Business Ethics: Skewed Trade Offs Between Self and Other’ in D M Messick and A E Tenbrunsel (eds) Codes of Conduct: Behavioural Research and Business Ethics (New York: Russell Sage, 1996).


board minutes. We cannot know whether a minuted pre-opportunity board decision not to pursue a development in a new business area was influenced by a director who had a conscious or unconscious eye on the personal exploitation of an upcoming opportunity. However, if the courts place less reliance on internal corporate documents and focus upon whether there is a synergistic relationship between the opportunity and the company’s current activities, the scope of business area investigation can take place without reliance upon a suspect factual record. Independent outsiders, such as financial analysts, regularly assess the strategic advantages and possible synergies of company developments and acquisitions. There is no reason to think that judges could not do the same or at least be able to assess the evidence of such independent outsiders.

In contrast to the Aas v Benham corporate opportunities approach, the maturing business opportunity test is incompatible with the Law Lords’ reticence to consider facts potentially tainted by conflicted parties. Whereas the scope of business determination can largely be made based upon evidence that is not directly related to, or a product of, the exploitation of an opportunity, the maturing business opportunity test is wholly dependent on evidence which is unavoidably the product of the non-aligned interests. For example, how is it possible to determine that a company is not actively pursuing a business opportunity or whether an opportunity was ripe (or should have been ripe) without relying upon evidence that may have been inappropriately, whether consciously or unconsciously, influenced by the conflicted director’s personal interests? Protestations from independent directors that they were not so influenced are unreliable. Professional integrity and reputation as well as the duty to act in the best interest of the company require that such influence is not acknowledged. There is no way for the court to have access to a reliable factual record to make these determinations. For this reason the maturing business opportunity test offers a flawed basis for reform which is incompatible with the leading no-conflicts authorities.

In addition to being consistent with the no-conflicts approach’s rejection of fairness facts, the Aas v Benham scope of business test, which would focus on the company’s existing business activities, arguably corresponds to the no- conflict approach’s central if unarticulated rule. If the no-conflicts approach prohibits the taking of opportunities by directors which result in a conflict between the director’s and the company’s interests it needs to provide us with clear guidance on the meaning of ‘the company’s interests’. Several proxies for ‘interest’ are available. Taking a formal legal perspective one could determine ‘interests’ by reference to what the company is authorised to do in its objects clause. Understanding the company as a vehicle for profit maximisation, one would argue that it has an interest in any opportunity with a positive net-present value.87 A more pragmatic approach, but also one that complements management theories that encourage companies to focus on their core competences,88 would equate ‘interest’ with what the company does and how what it does may synergise with other activities. It is submitted that only

87. Prentice and Payne, above n 47, at 202. 88. See generally, R M Grant Conremporaty Struregic Analysis (Oxford: Blackwell, 5th edn, 2005) pp 130-185.

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the latter business area approach is a reasonable proxy for company interest. Most companies, even investment-based companies such as private equity and venture capital firms, do not seek and invest in any positive net-present value project. They invest in value opportunities that are connected to or synergise with their existing activities, where the company’s economies, routines, capabilities and experience add value to the opportunity.

The position that the notion of ‘company interests’ contains latent business area parameters is, it is submitted, the better reading of the no-conflicts case law. The courts, however, have failed to provide clarity in this regard. Whilst recent commentary supports the business area position,s9 explicit judicial support for this claim is limited.”’ In Industrial Development Consultants v C ~ o l e y , ~ ’ where the defendant former director personally entered into a contract to provide architectural services which his former company would have been interested in obtaining, Roskill J in applying the no-conflicts rule9* referred to what is of ‘concern’ or ‘relevant to’ the company to delineate the nature of the duty owed by the director. Whilst notions of ‘concern’ or ‘relevance’ have of themselves no explicit business area parameters, Austin has argued that they could be interpreted to refer to such parameters, although he acknowledges that, as with ‘interest’ it could be read more br~adly .~’ In Bhullar v B h ~ l l a r , ~ ~ the defendant, a director of a family-owned grocery business which also had one investment property, identified a real estate opportunity which was situated next to the company’s investment property. Jonathan Parker LJ held that the director had a duty to inform the company about the real estate opportunity because acquiring the property was ‘commercially attractive’ to the company. At first glance the notion of ‘commercially attractive’ seems to correspond to the broad positive net-present value understanding of ‘interest’ .y5 However, the court found that the real estate opportunity was commercially attractive as the real estate was adjacent the company’s only investment property. It has been argued that this suggests an understanding of ‘company interest’ that includes opportunities that are geographically proximate to the corporate premises.9h It is suggested, however, that geographical proximity is relevant only because of the relationship between the nature of the opportunity and the

89. J Armour ‘Corporate Opportunities: If in Doubt Disclose (But How?)’ (2004) 63 CLJ 33 at 34. 90. It is noteworthy that clause B6( 1) of the Company Law Reform White Paper (Cm 6456,2005) makes no attempt to resolve this issue. 91. [1972] 2 All ER 162. 92. Following Koh, above n 20, at 418, liability in ZDC v Cooley [ 19721 2 All ER 162 is understood to be based upon the application of the no-conflicts rule. See also: Item Software v Fassihi [2005] ICR 450 at 462; and Gower and Davies, above n 48, p 89. 93. Austin, above n 20, pp 145-147 See also D Prentice ‘Director’s Fiduciary Duties - The Corporate Opportunity Doctrine’ (1972) Can BR 623 at 629 arguing that following ZDC v Cooley, English law could be formulated in a manner similar to the line of business test used in several US states. 94. [ 20031 BCC 7 1 I . 95. Prentice and Payne, above n 47, at 202 noting that ‘it would be in keeping with the approach in Bhullar to treat anything of economic value to the company as potentially falling within the company’s line of business’. 96. Armour, above n 89, at 34.


company’s ancillary real estate investment activities. That is, underlying the courts focus on geography is the idea that the adjacent property could enhance the value of its existing activities, which in this case involved a real estate investment. In fact the adjacent property was already being used in part to provide car-parking facilities to the lessee of the investment property. It is submitted that if the opportunity had simply been adjacent to the company’s headquarters then it wouid not have been ‘commercially attractive’ to the company and there would have no possible conflict of interest.

Accordingly, although the no-conflicts case law has not explicitly recognised a business area limitation on the scope of a company’s interests, a strong case can be made that such a rule implicitly guides the application of the no-conflicts approach to companies. From this viewpoint, the Aas v Benharn corporate opportunities doctrine simply makes explicit that which is implicit in the no-conflicts approach. Aas v Benham, therefore, would allow a change of regulatory lens whilst restating and not reforming the law.

IV. CONCLUSION

To propose a change in the way in which the law thinks about a problem leads naturally to the inference that the proposal would change the way in which it regulates that problem. Herein lay the source of Principle 6’s ambiguity: without further clarification it could be read either as a restatement or as a reform of the law. On the one hand, although it introduced a corporate opportunity framework, the existing no-conflicts approach could well serve as the instantiating rule. On the other hand, the adoption of a corporate opportunities approach refers us to the ways in which English law has previously employed such an approach. Principle 6 failed because the CLR did not understand the latent interpretative possibilities generated by changing the way in which the law thinks about a problem.

The corporate opportunities framework focuses our attention on how the language of property can be used in a qualified sense. Information and opportunities are not referred to as property, as Lord Upjohn put it, in the normal sense of the word. Rather the language of property refers to a relationship between the information, the director and the company, but with no one else. Opportunities and information about opportunities are treated as if they were property. This distinction allows us to re-read the understanding of the property-information relationship in Boardman v Phipps and to see that property is used by their Lordships in both its ‘normal’ sense and in the corporate opportunities sense. This insight enables us to go beyond Lord Upjohn’s objections and, through Viscount Dilhorne, to revisit the nascent corporate opportunities doctrine set forth in Aas v Benham and Dean v MacDowell.

This article argues that the Aas v Benham approach has the advantage of making explicit the implicit operations of the no-conflicts approach and would have provided a doctrinally consistent way of resolving the considerable uncertainty that would have been introduced had Principle 6 been enacted. Fortunately, reliance on Aas v Benham will no longer be required to resolve the indeterminacy of Principle 6. The scope of business approach remains, however, an approach that should be taken seriously. It is a corporate

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opportunities restatement of the no-conflict approach. It makes explicit what is implicit in the no-conflict approach and is easy to grasp for the directors who lives it regulates. In allowing us to rediscover this latent English corporate opportunities doctrine, Principle 6 may well have made a positive contribution to English opportunities regulation.

does it matter how the law thinks about corporate opportunities?

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