Pennyfeathers Ltd & Ors v Pennyfeathers Property Company Ltd & Ors

A manuscript note recording commercial negotiations will not create a binding contract where the parties objectively intended further formal documentation, material terms remained unsettled, or the transaction was expressly conditional on further events. Directors remain subject to fiduciary duties until those duties are properly released; an agreement in principle to buy out shareholders is insufficient.

A director breaches the no-conflict rule by diverting to another company a commercial opportunity which the company was established to pursue, unless the company or its shareholders give fully informed consent. Consent cannot be inferred from silence where the material facts were withheld. Interposing a company or trust does not prevent the court from attributing the diversion to the directors or from impressing the acquired assets with a constructive trust.

The claim concerned the proposed development of land on the Isle of Wight. The individual claimants and their company, Pennyfeathers Ltd, alleged that two directors had diverted the development opportunity to Pennyfeathers Property Company Ltd and had acquired surrounding land options for their own benefit.

The defendants contended that the parties had concluded a binding buy-out agreement at a meeting on 27 December 2007, that the shareholders’ agreement had therefore ended, and that the directors had consent to pursue the project. The court had to determine whether the buy-out agreement existed, whether the directors remained fiduciaries, whether their conduct involved a conflict of interest or bad faith, and what consequences followed from the use of an offshore company.

1. No concluded buy-out agreement. The manuscript note made at the 27 December 2007 meeting was not a binding contract. The parties lacked both the necessary subjective intention and the objectively ascertainable intention to create legal relations. The note was unclear on important matters, one shareholder was absent, negotiations continued, later heads of terms were marked subject to contract, and the buy-out was intended to proceed alongside a satisfactory agreement with the farm owner. The approach in The Hannah Blumenthal [1983] 1 AC 854 and RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH [2010] 1 WLR 753 supported that conclusion.
2. Continuing fiduciary duties. The failure to assign the 2005 option was not a repudiatory breach of the shareholders’ agreement. In any event, the defendants had affirmed that agreement after the assignment problem became apparent. Their fiduciary duties therefore continued until their resignation as directors.
3. Conflict and bad faith. The farm development was the opportunity which Pennyfeathers Ltd had been established to pursue. Causing the Jersey company to enter the 2008 purchase and surrounding land options created a conflict with the company’s interests and constituted a serious breach of the no-conflict rule. The defendants also acted in bad faith by concealing their activities and advancing the project without concluding the promised buy-out.
4. Consent. The shareholders had not given fully informed consent. They had insisted that the farm purchase should not proceed until the buy-out was concluded, were not given the relevant purchase agreement, and were not informed of the surrounding options. Silence and failure to seek an injunction did not amount to consent or ratification.
5. Other equitable duties and corporate structure. No additional fiduciary duties arose between the individuals from a joint venture or under the equity in Pallant v Morgan. The interposition of the Jersey company did not prevent the directors’ breach. The benefits acquired were impressed with the same trust as if the directors had acquired them personally.
6. Relief. Laches and acquiescence were not established. Questions concerning the final allocation of shares and any trustee’s lien were left unresolved. The court declined to make declarations as to the trust or relief until those matters had been properly argued.