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Directors’ duties: the need to keep the board informed

A warning for directors of their responsibilities when taking up an opportunity of which they became aware when acting as directors of the company.

The recent case of Cullen Investments Ltd v Brown (Chancery Division, 27 February 2015) warns directors of their responsibilities when taking up in their own name an opportunity of which they became aware when acting as directors of the company.

It is settled law that a director who profits personally from an opportunity that came to him as a director, must account to the company for that profit unless properly authorised by the board or subsequently ratified by the shareholders.

This case looks at the criteria to be satisfied for court approval for a shareholder to bring a derivative action in the name of the company. Although it does not rule directly on breach by a director of his duties, it considers the extent of the duty to make full and frank disclosure to the board when seeking approval to take up a transaction declined by the company.

The opportunity in question arose to a joint venture company to invest in property in Germany, and could not be converted without significant co-investment by third parties. One shareholder had agreed to cover an investment shortfall by lending to the company at a very high interest rate, but this was not approved by the board. In January 2009, a director (Mr Brown) representing one shareholder emailed the director representing the other shareholder that he proposed to invest in his own name. Neither the other shareholder, nor its representative director, responded.

Subsequently, whilst the evidence available in February 2009 suggested that Mr Brown was proposing to take a personal 10% stake in the opportunity, he told the board that no other investors had been found and continued to disguise his involvement. He eventually invested formally in April 2009.

The court did not consider that the lack of response to the January email constituted authority to the director to proceed.  The director’s subsequent reluctance to disclose his proposed investment was not consistent with authority having been granted.  Further, in his January email Mr Brown stated that he would keep the other shareholder informed of progress.

Although the court did not have to decide whether there had been any breach by Mr Brown of his duties, its comments appear to suggest that continuing disclosure to the board may be a pre-requisite of compliance. Clearly, the court in this case was influenced by hints that Mr Brown had wilfully concealed the terms of his personal investment following the January email, despite his apparent intention to keep the board informed. Nevertheless, a change in the nature or scale of the opportunity following board approval may lead a board to consider afresh taking up the opportunity and to revoke its approval. Even if the failure to update the board is inadvertent only, it could lead to a claim against the director to account for the profit that he has earned.

If you are interested in finding out more about this issue, please contact Paul Raftery, Head of our Corporate Practice Area, on 0161 214 0528 or email paul.raftery@weightmans.com.