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A company which discovers a breach of duty by one of its directors should consider carefully the merits of formal legal proceedings, according to a corporate lawyer.
“A director who has been involved in a competing business without disclosing that interest to the company is potentially liable for breach of his fiduciary duties and can be required to account for the profits earned through such competing activities,” says Philip Round, a partner at George Green LLP based at its Wolverhampton office. “If, however, there is a tenuous relationship between the director’s activities and the profits in question, the cost of legal proceedings may well be disproportionate to the likely level of the award.”
Mr Round explains, “the recent High Court case of Gamatronic (UK) Ltd v Hamilton concerned directors who, prior to resigning their directorships with their existing employer, had initiated discussions about a role with a potential competitor and invested some funds in the competing business. After the directors had resigned and commenced their new employment, their former employer discovered their activities and claimed that the individuals had breached their duties to avoid conflicts of interest, and to act in good faith and promote the success of the company.”
According to Mr Round, the court found that the directors had indeed breached their duties. “The court explained that the question of whether taking preparatory steps in relation to a new venture amounted to a breach of duty would depend on the specific circumstances. There had, however, clearly been a breach of duty here given that the directors had invested in the competing entity and one of the directors had assisted in setting the competitor’s product prices. The time spent on the competing activities was, nevertheless, limited and the profits claimed by the former employer were not earned until almost a year after the conduct in question had occurred. There was, therefore, no reasonable relationship between the profits and the breaches of duty for which the directors were liable, and the former employer was unable to claim reimbursement of them.”
Mr Round concludes, “in many circumstances companies have no choice but to take formal action against defaulting directors, particularly where their actions have resulted in significant damage to a company’s goodwill. Companies should, however, seek advice from a lawyer experienced in commercial litigation, who can provide a frank assessment of the prospects of success and whether it is financially worthwhile to pursue the claim.”