O'Donnell v Shanahan & Anor

A director who obtains information and a business opportunity while acting for the company must disclose the opportunity and obtain the company’s informed consent before taking it personally. The duty does not depend on whether the opportunity falls within the company’s existing business, or whether the company could or would have pursued it.

A director also acts in conflict where personal participation in a transaction leads the director to sacrifice the company’s entitlement to remuneration. Later compensation of a shareholder does not retrospectively cure that breach. Acquiescence requires full knowledge of the material facts.

The appellant, a shareholder and director of a quasi-partnership company, petitioned under section 459 of the Companies Act 1985. She alleged that the two respondent directors had unfairly prejudiced her interests by acquiring an investment property opportunity arising from work undertaken for the company.

The High Court dismissed the petition in [2008] EWHC 1973 (Ch), holding that property investment fell outside the company’s business and that the respondents had breached neither the no-profit rule nor the no-conflict rule. The appeal concerned those fiduciary rules, acquiescence and whether any failure to account for profits caused unfair prejudice.

1. Appeal allowed and issue remitted. The respondents acquired the property interest in breach of both the no-profit and no-conflict rules. The question whether their failure to account for any profit unfairly prejudiced the appellant, and what relief should follow, required factual findings not yet made and was remitted to the trial judge (per Rimer LJ; Aikens and Waller LJJ agreeing).
2. The respondents obtained the relevant information and opportunity while acting as directors for the company. As between each director and the company, the company had the better right to use information acquired in the course of the directorship. The respondents therefore had to disclose the opportunity and obtain informed consent before taking it personally. Their potential accountability did not depend on whether property investment fell within the company’s existing business, or whether the company could or would have pursued the opportunity.
3. Aas v Benham concerned a partner whose fiduciary duties were circumscribed by the partnership contract. Its scope-of-business principle did not determine the duties of directors, whose fiduciary position was not similarly confined. The strict approach in Regal (Hastings) Ltd v Gulliver governed the respondents’ liability.
4. The respondents also entered a conflict of interest and duty. To secure the substitute purchase in which they participated personally, they sacrificed the company’s entitlement to a proper commission. Their later compensation of the appellant could redress her individual loss but could not retrospectively prevent the acquisition from having been made in breach of duty.
5. The appellant had not acquiesced. Acquiescence in a fiduciary breach required full knowledge of the material facts, which she lacked. Although the company could not and would not itself have bought the property, a failure to account for any profit might have damaged the company and unfairly prejudiced her membership interests. Whether there was a profit, and whether an account would benefit her given the company’s insolvency, remained to be tried.

• Court of Appeal (Civil Division): allowed the appeal in [2009] EWCA Civ 751 and remitted the issue whether failure to account for any profit caused unfair prejudice, together with any consequential relief.
• High Court, Chancery Division: in [2008] EWHC 1973 (Ch) , dismissed the section 459 petition after finding no breach of either the no-profit or no-conflict rule.