1

ROBERT GORDON UNIVERSITY

Dept. of law

BSM 584 - Comparative Company Law

Essay 2013/2014

Glasvegas plc specialises in IT and computing solutions for the business market. The board is approached by Dr.

Octopus who offered a state of the art software package to the company for £2 million plus a percentage of future

related profits for 5 years. The offer was declined by the board due to a perceived lack of available funds for research

and development.

Walter Whyte, a director of Glasvegas, was at the board meeting and supported the unanimous decision to

reject the offer.

Walter later discussed the offer from Dr. Octopus with an associate (and fellow IT expert) Craig Smith, and

they agreed to form a syndicate with Dr. Octopus, and a shady investor friend, Carlo Verdi who is resident in

Italy, to develop and market the software. The syndicate then formed a company, Sevco 2012, (a Societas

Europa) from an existing UK company controlled by Carlo Verdi, for this purpose.

When the software was launched, Walter personally contacted a number of Glasvegas’ clients. The launch led

to significant orders.

(A) Consider the law which is generally applicable to this situation (in the UK and the EU) and the roles of all

the participants.

(B) Advise Glasvegas plc of any breach of duty to the company committed by Walter Whyte, and any remedies

available against him. He is still a director of Glasvegas plc.

(C) Would the answer be materially different if Walter had resigned his directorship prior to forming Sevco

2012 in to an SE for the purpose of exploiting this opportunity?

(D) Consider the legal situation if this scenario had been played out in the USA.

Please state any and all assumptions you make in your answer and consider relevant case and statute precedent at the

relevant level and in the relevant jurisdiction, in your answer.

Additional factors you should consider in particular are the treatment of shareholders rights, and the measures to

uphold these and good corporate governance.

Your answer should involve reference to appropriate case and statutory authority.

Words: 5495

2

Fiduciary duties. The director’s duty of loyalty.

Fiduciary duties are a moral category that derives from equity and are generally described as a

requirement to one person, called a fiduciary to act solely in the interests of another.1 In the 1997

UK case Bristol and West Building Society v Mothew2, Judge Millett L.J achieved one of the most

accurate definitions on the matter, stating that a fiduciary is “someone who has undertaken to act

for or on behalf of another in a particular matter in circumstances which give rise to a relationship

of trust and confidence.” Than he continued even more brilliantly by focusing on the duty of

loyalty, which will be in the main focus of the present essay:

“The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to

the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act

in good faith; he must not make a profit out of his trust; he must not place himself in a position

where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a

third person without the informed consent of his principal. This is not intended to be an exhaustive

list, but it is sufficient to indicate the nature of fiduciary obligations.”3

For comparative company law purposes the directors’ fiduciary duties are generally divided in two

main sub-categories: the duty of care and the duty of loyalty.4 The former is practically derived

from the law of negligence, while the latter stems from the fiduciary principles established by

courts in regard to equity.5

It is widely-agreed that the common law systems were the first to establish and develop the duty of

loyalty doctrine, while civil law systems reached the concept at a later stage and applied it more

cautiously.6 The main reason for this different standing is the fact that historically (since 19

th

century), when considering and ruling on the director’s duty of loyalty, common law courts

regarded the matter on the basis of the equitable principles applicable to the trustee’s fiduciary duty

1 D. Lewis, “Whistleblowing in a changing legal climate: is it time to revisit our approach to trust and loyalty at the

workplace?”, (2011), 20(1), Business Ethics: A European Review, page 71-87 2 [1997] 2 W.L.R. 436

3 Ibid, page 18

4 K. J. Hopt, ‘Comparative Company Law’, in: M. Reimann, R. Zimmermann, eds., The Oxford Handbook of

Comparative Law, (Oxford University Press, Oxford, 2006), page 1161–1191. 5 K. J. Hopt, “Conflict of Interest, Secrecy and Insider Information of Directors, A Comparative Analysis”, (2013), vol.

2, ECFR, page 169 6 Ibid., page 168-169

3

to his or her beneficiary. In common law, a trustee owes the strongest fiduciary duties,7 because a

trustee shall always act in the interest of the beneficiary and never in his own interest.8 When the

matter of the director’s duty of loyalty was initially addressed by common law courts in regard to

unincorporated companies, it had been treated by these courts as based on the trustee-beneficiary

relationship – the director being equated to a trustee who holds the shareholder’s property9.

Common law judges later continued to rely on the trustee doctrine and equally applied it to the

newly developed incorporated companies and the duties of their directors10

, without initially taking

into account that the incorporated company’s director, unlike a trustee, does not actually have the

legal title to the company’s property.11

The trustee–beneficiary and director- company

relationships were clearly distinguished in a 1967 case12

, by LJ Porter holding that: “directors, no

doubt, are not trustees, but they occupy a fiduciary position towards the company whose board

they form.”13

Even though, today, it is clear that the company’s director is not in strictu sensu legal

terms a trustee, he still has obligations similar to the trustee’s as he holds his powers and duties

only in order to serve the interests of the company.14

At the same time, the continental civil law jurisdictions do not have the tradition of the trust.15

Hence, civil law judges needed to consider and develop the directors’ duties concept in the light of

the existing company laws, with recourse to general civil law agency principles, which are

somehow less strict than the common law trust rules.16

A further difference between the two

systems is derived from the fact that in common law the directors’ duties are more focused on

serving the interests of the shareholders17

, while in civil law systems the directors’ duties are

traditionally owed to the company or even straight to stakeholders – employees, clients or the

7 C. G.-Beuerle, P. Paech and E. P. Schuster, Annex to Study on Directors’ Duties and Liability, (LSE Enterprise,

London, 2013), page A874, http://ec.europa.eu/internal_market/company/docs/board/2013-study-reports_en.pdf

accessed 31.12.2013 8 D French, S Mayson and C Ryan, Mayson, French and Ryan on Company Law, (11

th Ed, Oxford University Press,

Oxford, 2010), page 471 9 Op. cit. K. J. Hopt, “Conflict of Interest, Secrecy and Insider Information of Directors, A Comparative Analysis”,

page 169 10

Ibid. 11

Op. cit. G.-Beuerle, P. Paech and E. P. Schuster, Annex to Study on Directors’ Duties and Liability, page A873 12

Regal (Hastings) Ltd v Gulliver, [1967] 2 AC 134. 13

Ibid, at [159] 14

Op. cit. C. G.-Beuerle, P. Paech and E. P. Schuster, Annex to Study on Directors’ Duties and Liability, (LSE

Enterprise, London, 2013), page A 874 15

Op. cit. Op. cit. K. J. Hopt, “Conflict of Interest, Secrecy and Insider Information of Directors, A Comparative

Analysis”, page 169 16

Ibid. 17

Ibid.

4

general public.18

This distinction is further strengthened by the development of a two tier board

system in many civil law countries in contrast to the common law single board tradition. In

jurisdictions like Germany and Austria, for instance, the board is split in two - managing board and

supervisory board - the former is formed by the latter and not directly by the shareholders,

respectively the directors are held directly accountable only to the company and not (or just

indirectly) to the shareholders.19

Only recently, with the 2006 Companies Act, the UK law has

been reformed to include (in sec. 172) the significance of the stakeholders and company by

obliging directors “to promote the success of the company for the benefit of its members as a

whole”.20

Nowadays, in the UK, the general directors’ duties are reformed and codified for the first time21

under the Companies Act 2006 (“CA 2006”), which provides for the duty of care, as well as for

duties related to conflicts of interest.22

Namely, the main directors’ duties are established under

Sections 171 to 177 of the Act and include the following seven general duties of the company’s

director: 1) Duty to act within powers; 2) Duty to promote the success of the company; 3) Duty to

exercise independent judgment; 4) Duty to exercise reasonable care, skill and diligence; 5) Duty to

avoid conflicts of interest; 6) Duty not to accept benefits from third parties; and 7) Duty to declare

interest in proposed transaction or arrangement.23

These statutorily provided duties are only

general and non-exhaustive - compliance with them would not excuse directors from breaches of

other duties, as the general duties are supplemented by a comprehensive body of common law

precedents dealing with the matter of directors’ duties24

, as well as by other statutorily established

duties (e.g. the insolvency and health & safety legislative acts).25

18

Ibid., page 170 19

P. Davies, K. Hopt, R. Nowak and G. van Solinge, ‘Boards in Law and Practice: A Cross-Country Analysis in

Europe’, in: P. Davies, K. Hopt, R. Nowak and G. van Solinge (Forum Europaeum Corporate Boards), eds., Corporate

Boards in European Law: A Comparative Analysis, (Oxford University Press 2013), page 5 20

Sec. 172, para 1, UK Companies Act 2006 21

Op. Cit. C. G.-Beuerle, P. Paech and E. P. Schuster, Annex to Study on Directors’ Duties and Liability, (LSE

Enterprise, London, 2013), page A 873 22

P. L. Davies and Sarah Worthington in Gower and Davies: Principles of Modern Company Law, (8th ed., London,

Thomson, Sweet & Maxwell, 2012), para 16–24. 23

Op cit. C. G.-Beuerle, P. Paech and E. P. Schuster, Annex to Study on Directors’Duties and Liability, (LSE

Enterprise London, 2013) page A 873 24

Ibid., page A869 25

S. Summerfield, R. Woodburn & L. Brocklehurst, T Smith (ed.), Company Directors, Jurisdictional comparisons

(1st Ed, Sweet & Maxell, 2012), page 523

5

The other important UK corporate governance instrument with relevance to directors’ duties is the

UK Corporate Governance Code 2010 (“UCGC 2010”), which focuses on directors' accountability,

audit requirements and relationship with shareholders. The Code allows companies to create and

establish their own governance policies in the light of its main and supporting principles of

corporate governance. The UCGC 2010 is not a statutory instrument, but a set of principles to

public companies, listed on the London Stock Exchange. It is overseen by the Financial Reporting

Council and its importance derives from the Financial Conduct Authority's Listing Rules. The

Listing Rules themselves are given statutory authority under the Financial Services and Markets

Act 2000 and require all listed public companies to disclose on how they have complied with the

code, and explain where they have not done so - in what the code refers to as the 'comply or

explain' principle.26

Directors’ duties in the USA.

As far as the USA is concerned, the Sarbanes-Oxley Act of 2002 (“SOX”) 27

has toughened public

companies’ corporate governance rules more than ever before and has established stricter corporate

governance rules.28

The SOX also provides for amendments in multiple federal level legislative

acts like the Securities Exchange Act of 1934, the Securities Act of 1933, the Employee

Retirement Income Security Act of 1974, Investment Advisers Act of 1940 etc. For instance, one

of these amendments in connection with the implementation of SOX’ Section 406 brought to the

reform of the NYSE Listed Companies manual to promote compulsory adoption of codes of

business conduct and ethics. These codes were intended to address the issue of directors’ fiduciary

duties and in particular the duty of loyalty by tackling the problems of “conflicts of interest” 29

, the

illegal pursuing of “corporate opportunities”30

and “unfair dealing”31

.

26

The UK Financial reporting council on Corporate Governance, http://www.frc.org.uk/corporate/ukcgcode.cfm

accessed 22.12.2013 27

(Pub. L. 107–204, 116 Stat. 745, enacted July 30, 2002) 28

D. C. Skinner, “Director Responsibilities And Liability Exposure In The Era Of Sarbanes-Oxley”, (2006), The

Practical Lawyer, page 38 29

Article 303A.10 of the NYSE Listed Company Manual: “Conflicts of interest. A "conflict of interest" occurs when

an individual's private interest interferes in any way - or even appears to interfere - with the interests of the corporation

as a whole. A conflict situation can arise when an employee, officer or director takes actions or has interests that may

make it difficult to perform his or her company work objectively and effectively. Conflicts of interest also arise when

an employee, officer or director, or a member of his or her family, receives improper personal benefits as a result of his

or her position in the company. Loans to, or guarantees of obligations of, such persons are of special concern. The

listed company should have a policy prohibiting such conflicts of interest, and providing a means for employees,

officers and directors to communicate potential conflicts to the listed company.”

6

Directors’ duties at EU level.

Finally, when we consider directors’ duties at European Union level, it must be clarified that there

is no unified solution towards the matter. Every Member state has its own unique approach and

ability to decide whether to codify and regulate directors’ duties or not. 32

Some jurisdictions rely

on detailed listings of directors’ duties, while others address the issue more generally via

provisions regulating the “behavioural expectations of directors in broad terms”.33

Even though

almost all Member states have already codified directors’ duties, general principles of contract law

and tort, as well as general fiduciary rules are still invoked in practice, if a regulatory gap needs to

be filled.34

The European Commission general intentions towards unification of corporate

governance rules proclaimed in its 2003 Action Plan for Modernising Company Law and

Enhancing Corporate Governance in the European Union35

are aimed at offering of a mix of

compulsory and non-compulsory measures on improving corporate efficiency and shareholder and

third-party rights.36

Even though, the Commission has taken the general standing that soft law measures for closer

corporate governance standards among Member states like recommendations (rather than

legislative acts) reflect the needs of the European Union more adequately, there are several EU

Directives, which directly or indirectly provide for certain corporate governance measures.

Remarkably, none of these addresses directly the issue of directors’ duties. Among these are

mainly directives regulating certain corporate governance aspects in public limited companies,

30

Article 303A.10 of the NYSE Listed Company Manual: “Corporate opportunities. Employees, officers and

directors should be prohibited from (a) taking for themselves personally opportunities that are discovered through the

use of corporate property, information or position; (b) using corporate property, information, or position for personal

gain; and (c) competing with the company. Employees, officers and directors owe a duty to the company to advance its

legitimate interests when the opportunity to do so arises.” 31

Article 303A.10 of the NYSE Listed Company Manual: “Fair dealing. Each employee, officer and director should

endeavor to deal fairly with the listed company's customers, suppliers, competitors and employees. None should take

unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of

material facts, or any other unfair-dealing practice. Listed companies may write their codes in a manner that does not

alter existing legal rights and obligations of companies and their employees, such as "at will" employment

arrangements.” 32

C. G.-Beuerle, P. Paech and E. P. Schuster, Study on Directors’ Duties and Liability, (LSE Enterprise, London,

2013), page viii http://ec.europa.eu/internal_market/company/docs/board/2013-study-analysis_en.pdf, accessed

20.12.2013 33

Ibid. 34

Ibid. 35

Modernising Company Law and Enhancing Corporate Governance in the European Union – A Plan to Move

Forward, COM (2003) 284 final (May 21, 2003). 36

F. Scott Kieff, Perspectives on Corporate Governance (Cambridge University Press, 2010), page 414

<http://www.myilibrary.com?ID=272358> accessed 23.12.2013

7

such as the so called Prospectus Directive37

, the Transparency Directive38

, the International

Accounting Standards Regulation39

, the Shareholder’s rights Directive 40

and the Statutory Audit

Directive41

. The latter provides for “comply or explain” policy similar to the policy of the UCGC

2010 and addresses corporate governance by requiring disclosure of information from public

companies as to their obedience to a national corporate governance code regulations, their

applicable control and risk-management systems, and a description of shareholders’ rights.42

As far as the director’s fiduciary duty of loyalty in particular is concerned - it may be summarized

that even though there is a lack of common EU level measures and such common measures may

never be taken - in most European countries the issue is addressed on national level, indeed –

more indirectly and not as strong as in common law jurisdictions, but the duty of loyalty’s

significance is acknowledged and regulatory measures are taken to fight its major negative social

effects, namely: 1) the self-dealing and 2) and the conflicts of interests.43

A new regulatory

development to modernise company law and enhance corporate governance was observed in

Europe 44

shortly before the outburst of the 2007-2008 World Financial Crisis and the following

European capital market’s volatility, briefly summarized by the European Commission’s position

in its commentary to the Annual Accounts Directive45

, which provides for disclosure on European

public companies’ corporate governance:

“The Commission has made quite clear its belief that the more national corporate governance codes

converge towards best practice, the easier it will be to restore confidence in capital markets in the

wake of the scandals that have shaken trust in some European companies. That is why it recently set

37

European Parliament and Council Directive (EC) No. 2003/71 on the Prospectus to be Published When Securities

Are to Be Offered to the Public or Admitted to Trading and amending Directive (EC) 2001/34, O.J. (L 345) 64 of Dec.

31, 2003) 38

European Parliament and Council Directive (EC) 2004/109 on the Harmonization of Transparency Requirements in

Relation to Information About Issuers Whose Securities Are Admitted to Trading on a Regulated Market and

Amending Directive (EC) 2002/34 O.J. (L 390) 38 of Dec. 31, 2004 39

Regulation (EC) No. 1606/2002 of the European Parliament and of the Council on the Application of International

Accounting Standards, O. J. (L 243) 1 of Sept. 11, 2002 40

Directive 2007/36/EC of the European Parliament and of the Council of July 11, 2007 on the exercise

of certain rights of shareholders in listed companies, O. J., L 184/17 of July 14, 2007 41

European Parliament and Council Directive (EC) No. 2006/43 of May 17, 2006, on Statutory Audits of Annual

Accounts, amending Council Directive (EEC) No. 78/660 and Council Directive (EEC) No. 83/349/EEC and repealing

Council Directive (EEC) No. 84/253, O.J. (L 157) 87 of June 9, 2006 42

Op. cit. F. Scott Kieff, page 439 43

Op. cit C. G.-Beuerle, P. Paech and E. P. Schuster, Study on Directors’ Duties and Liability, (LSE Enterprise,

London, 2013), page xi 44

M. Belcredi, G. Ferrarini, “The European Corporate Governance Framework:Issues and Perspectives”, (2013), ECGI

Working Paper Series in Law, Paper N°. 214/2013, page 4, http://ssrn.com/abstract=2264990 accessed 02.01.2014 45

Directive 2006/46/EC of 14 June 2006, O.J. (L 224) of August 16, 2006

8

up the European Corporate Governance Forum … but that convergence can best be achieved by

building on national traditions, not by attempting a “one size fits all” solution.” 46

A) Consider the law which is generally applicable to this situation (in the UK and the EU)

and the roles of all the participants.

As we have already discussed the laws applicable to directors’ duties in the UK and the EU in the

above brief presentation on directors’ duties in UK, USA and the EU, hence we shall now focus on

the roles of all the participants.

A1) Walter White as a director of Glasvegas plc. Duty of Loyalty.

The major interest clashes between the company and its directors in terms of loyalty are identified

by Beuerle and Schuster in their study on Directors’ Duties and Liability, to include:

“(1) related party transactions (self-dealing), i.e. transactions between the company and the director,

either directly or indirectly; and

(2) corporate opportunities, i.e. the exploitation of information that ‘belongs’ to the company, in

particular information that is of commercial interest to the company.” 47

They continue by stating that most other directors’ responsibilities for loyalty, such as “not to

compete with the company, not to accept benefits from third parties that are granted because of

directorship, and not to abuse the powers vested in the directors for ulterior purposes” are a result

of the above two possible major areas of conflict between the director and the company.48

The duty of loyalty of Walter White, which shall be considered in the Glasvegas plc’s case

scenario, is generally understood as designed to address conflicts of interest between a member of

46

European Commission proposal for amending the Accounting Directives - Frequently Asked Questions European

Commission - MEMO/04/246 of 28/10/2004 http://europa.eu/rapid/press-release_MEMO-04-246_en.htm, accessed

22.12.2013 47

Op. cit C. G.-Beuerle, P. Paech and E. P. Schuster, Study on Directors’ Duties and Liability, (LSE Enterprise,

London, 2013),, page xi 48

Ibid

9

the managing board and the company.49

More developed and coherent under common law, a

number of precedent court decisions have cultivated the duty of loyalty’s broad doctrine to include

various situations where the interests of the directors contradict with the interests of the company.50

In the UK, the Companies Act 2006 applies as a unified company law act, which comprises both

the regulatory regimes for public and private companies. The director’s duty of loyalty is

established under Section 175, where the UK legislators provide for avoidance of conflict of

interests by the company’s directors and restraint of possible exploitation of “of any property,

information or opportunity”. 51

At the same time, at European Union level, as discussed above,

there is not even one single instrument explicitly regulating the matter, but there are just multiple

sets of both statutory and non-binding EU rules regarding different aspects of public companies’

corporate governance.

A2) Glasvegas. A UK public limited company.

Glasvegas is a “plc”, which according to UK company law stays for a public limited company.

This is why we assume that Glasvegas is a UK company. The direct consequence of the fact that

Glasvegas is a public company is that it is subjected to a stricter and more detailed legal regulation

as public company’s shares are traded on the free capital market. The public companies’ proper

regulation is especially important for the stability of any country’s financial system. In the UK, the

public offering of company’s shares is regulated by the Financial Services Authority established

under the Financial Services and Markets Act 2000. On the other side, the Companies Act 2006

establishes special rules applicable to public companies, including rules for the formation and

structure of public limited companies, and among other - higher requirements for public companies

in regard to share capital, management, audit, transparency and reporting.52

A3) Sevco 2012. A Societas Europa

Sevco 2012 is a joint venture company, founded by Dr. Octopus, Carlo Verdi and Walter White. It

is in the form of a Societas Europa, which is also known as European Company or “SE” and is a

49

Ibid. 50

Ibid. 51

Op cit. C. G.-Beuerle, P. Paech and E. P. Schuster, Annex to Study on Directors’Duties and Liability, (LSE

Enterprise London, 2013) page A 878 52

UK Companies Act 2006, e.g. section 58, 160, 271-280, 489-491, 598, 650-651, 656, 662-670, 678 , 679 etc.

10

type of public limited-liability company regulated under EU law.53

It is introduced in 2004 and is

governed by Regulation 2157/2001 on Statute for a European company (SE)54

and Council

Directive 2001/8655

supplementing the Regulation and concerning the practices of employee

involvement within the companies participating in the establishment of a SE. The Societas Europa

is designed to facilitate the free movement of capitals throughout different EU member states,

while providing adequate shareholders’ and third parties’ protection. It enables European business

to create and manage companies on a European scale, which are regulated on EU law level, free

from the territorial limitation of national company laws.56

Most importantly, the European company allows an adaptation of its organizational structure,

choice of a convenient corporate governance system and proper involvement of employees in the

management of the company.57

A4) Carlo Verdi. Director of Sevco 2012

For the purposes of the present essay, we will assume that Carlo Verdi is both a shareholder and a

managing director of Sevco 2012, as in the case scenario he is clearly defined as having control

over the company. We also assume that Walter White and Dr. Octopus are shareholders in Sevco

2012 as well, but do not have direct control over the company.

(B) Advise Glasvegas plc of any breach of duty to the company committed by Walter Whyte,

and any remedies available against him. He is still a director of Glasvegas plc.

B1) White’s fiduciary duties

Glasvegas plc is a UK company –meaning that the seven general directors’ duties under the UK

Companies Act 2006 Sections 171 – 177 (as listed above) shall be applied and interpreted by the

53

The EU Single Market thematic website on EUROPA. http://ec.europa.eu/internal_market/company/societas-

europeae/index_en.htm accessed 01.01.2014 54

Council Regulation (EC) No 2157/2001 of 8 October 2001 55

Council Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a European company with regard to

the involvement of employees 56

Report From The Commission To The European Parliament And The Council on The application of Council

Regulation 2157/2001 of 8 October 2001 on the Statute for a European Company (SE), http://eur-

lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52010DC0676:EN:NOT accessed 02.01.2014 57

Ibid.

11

UK court “in the same way as common law rules or equitable principles” 58

to decide on any

eventual breaches of Walter White’s fiduciary duties as a director. The most probable cause of the

breach of White’s fiduciary duties, as discussed above and as confirmed by Mayson and French is

that he will need to surrender any profits made in breach of his duty to Glasvegas and restore them

to the company59

, regardless of whether Glasvegas has suffered any losses or not.60

Deciding if

there was an actual breach of White’s directors’ duties is not straightforward at all and the court

would need to consider multiple details on the case.

For instance, the fact that Glasvegas’ board of directors has already considered and rejected buying

the claims may have important implications to White’s eventual breach of duties. In a 1966

Canadian case known as Peso Silver Mines v Cropper 61

, the facts of which are quite similar to the

Glasvegas’ case scenario, the Peso’s (a mining company) board of directors rejected (after a bona

fide consideration) an offer to buy 126 prospecting claims, located close to Peso’s own property. A

joint venture company was than founded by the Peso’s geologist and the offeror (the equivalent of

Dr. Octopus in Glasvegas’ scenario), which was later joined by one of Peso’s directors named

Cropper. The new company bought the claims. Cropper, as a member of Peso’s board, had also

supported the Peso’s prior decision not to buy the claims. In an action brought against Cropper

claiming that he was accountable to Peso for the shares he owned in the joint venture company, the

Canadian Supreme court held that Cropper was not bound to account. According to the decision,

Cropper as part of the board had acted earnestly and in accordance with Peso’s best business

interests when rejecting to buy the claims. No evidences were presented that Cropper possessed

any extra information on the deal without informing his co-directors. The judges also held that at

the time of Cropper’s joining of the newly formed company he did not act in his role as a director

with Peso but as “an individual member of the public”, whose participation in the joint venture

company was merely sought as a co-adventurer. The case gives a reason for scholars like Smith

and Keenan to conclude that “a director may take advantage of a corporate opportunity on his own

account if his company has considered the same proposition and rejected it in good faith.”62

58

UK Companies Act 2006, Section 170 (4) 59

Murad v Al-Saraj [2005] EWCA Civ 959, [2005] WTLR 1573, per Arden LJ at [56] and Jonathan Parker LJ at [108] 60

Op. Cit. D French, S Mayson and C Ryan, page 471 61

(1966) 58 D.L.R. (2d) 1 62

K Smith and D Keenan, Smith & Keenan’s Company law, (13th

ed, Pearson Longman, 2005), page 357

12

Walter White’s position is not as straightforward as Cropper’s if we consider the general standing

of UK courts on the matter of conflicts of interest that is established throughout the years in

different cases. For instance, in Regal (Hastings) Ltd. v Gulliver and Others63

, LJ Porter, held that:

Directors, no doubt, are not trustees, but they occupy a fiduciary position towards the company

whose board they form. Their liability in this respect does not depend upon breach of duty but upon

the proposition that a director must not make a profit out of property acquired by reason of his

relationship to the company of which he is director. It matters not that he could not have acquired

the property for the company itself - the profit which he makes is the company's, even though the

property by means of which he made it was not and could not have been acquired on its behalf.

An important distinction must be made between Peso Silver Mines v Cropper’s and Glasvegas’

case scenarios. What is quite different in Walter White’s case is that according to the hypothetical

scenario White not only took over the opportunity and became a shareholder at Sevco 2012 whose

business is in the same area like Glasvegas’ business (namely – IT and computing solutions) , but

also took advantage of his position as a director of Glasvegas by personally contacting “a number

of Glasvegas’ clients” in order to promote and sell Sevco’s software product. The latter can be

interpreted as a breach of the no exploitation of information provision established under the UK

Companies Act 2006. CA 2006 Section 175 deals with the directors’ duty to avoid conflict of

interest. The Section 175 rules are founded on the so called no-conflict and no-profit rules64

, as

described in the 1986 case Bray v Ford65

:

It is inflexible rule of a court of equity that a person in a fiduciary position … is not, unless

otherwise expressly provided, entitled to make a profit [the non-profit rule]; he is not allowed to put

himself in a position where his interest and duty conflict [the no-conflict rule]

In the hypothetical case’s scenario White’s interests are in a direct conflict with the interests of

Glasvegas plc, since the former obviously obtained profits as Sevco’s shareholder from the fact

that the launch of Sevco’s new software product sales had “led to significant orders.”, which (as we

assume that Sevco has made profits) is a breach of the non-profit rule. White is in breach of his

fiduciary duty to avoid conflicts of interest by exploiting information that he possesses as a director

63

[1967] 2 A.C. 134 64

Op. Cit. D French, S Mayson and C Ryan, page 494 65

[1896] A.C. 44

13

of Glasvegas by using contacts of Glasvegas’ business customers for the purposes of Sevco 2012’s

own business interest. The duty is set under Sec. 175 (2) of UK Companies Act 200666

, saying that

a director shall abstain himself from exploiting “any property, information or opportunity” in

conflict with the interests of the company. The Sec. 175 (2) provision is based on the so called

equitable corporate opportunity doctrine, providing that a director would be in breach of his

fiduciary duties if he “pursues for his or her own benefit a business opportunity which would be

regarded in equity as belonging to the company”.67

It is confirmed by scholars in that regard, that a

company’s director would definitely be in breach of his duties to the company if he takes

advantage of his contacts with customers and draws them to trade with his own separate business.68

For the above reasons it may be held that White shall remedy Glasvegas plc for all profits made by

Sevco 2012 in result of purchases made because of the exploitation of his connections with

Glasvegas’ clients. Additional remedies are also possible, as found out below.

B2) Remedies

According to the traditional common law principle, if there is a breach of fiduciary duties, the court

would require the fiduciary to remedy the beneficiary for any misappropriations caused69

.

According to Section 178, the remedies for breach of directors’ duties under Companies Act 2006

are based on the equitable principles and common law rules.70

The remedies for breach of

directors’ fiduciary duties are generally aimed more at preventing the breach than compensating

the company.71

This is why it is established that the remedies may exceed the actual damage

caused, meaning that White might have to return all profits made by his involvement of Sevco’s

business, regardless of Glasvegas’ actual losses if any at all.72

The director’s liability extends only

to profits caused by the breach of his fiduciary duty and this liability is personal, so that a director

will not be held into account for profits gained by another person.73

So, if White is found liable for

his involvement in Sevco’s business – Glasvegas plc will only be able to claim his own share of

Sevco’s profits. Glasvegas may also claim equitable compensation cumulative to the return of

66

Op. Cit. D French, S Mayson and C Ryan, page 495 67

Ibid., page 495 68

Ibid., page 498 69

Op. cit. K. J. Hopt, “Conflict of Interest, Secrecy and Insider Information of Directors, A Comparative Analysis”,

page 169 70

Op. Cit. D French, S Mayson and C Ryan, page 507 71

Ibid., page 508 72

Ibid. 73

Ibid.

14

profits, if it manages to prove an actual loss caused by White’s breach of fiduciary duties.74

The

possibility for Glasvegas’ shareholders claiming remedies for the company via the so called

“derivative claims” is discussed below.

(C) Would the answer be materially different if Walter had resigned his directorship

prior to forming Sevco 2012 in to an SE for the purpose of exploiting this opportunity?

Generally, in case there are no explicit restraining provisions in the director’s service agreement, a

company’s director is not banned from competing with his previous company once he leaves.75

However, according to the judge-made law76

it is held unacceptable for a director to resign with the

sole aim of exploiting an opportunity that has arisen at the time he or she was still a member of the

company’s board77

. Respectively, in connection with the directors’ duty to avoid conflicts of

interest with the company, the 2006 Companies Act Sec. 170 (2) rule provides that the resignation

of a director is irrelevant to his duty to avoid conflicts of interest which he owes to the company

even after he ceases to be a director “as regards the exploitation of any property, information or

opportunity of which he became aware at a time when he was a director”.78

In the 2007 case Foster

Bryant Surveying Ltd. v Bryant79

it was further clarified by the court that, even though the fiduciary

duty does not necessarily always survive the end of the director’s relationship with the company80

,

in case that the directors’ resignation is intended to discharge the director from his fiduciary duties,

because of his intention to avoid accountability to the company for a business opportunity planned

to be exploited and stolen from the company while still at office, the director would be still in

breach of his duty to avoid conflicts of interest.81

Therefore, the question if the answer would be

materially different if White had resigned his directorship prior to forming Sevco 2012 is negative.

At that time Glasvegas’ board of directors has already rejected Dr Octopus’ offer with Walter

White still a director. Hence, White has already been informed on the opportunity and we assume

74

Ibid., page 510 75

Ibid., page 489 76

Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443; CMS Dolphin Ltd v Simonet [2001] 2 BCLC

704 77

Ibid. 78

Ibid. 79

[2007] EWCA Civ 200 80

In Plus Grup Ltd v Pyke [2002] EWCA Civ 370 81

Ibid., page 1568

15

that he would have planned to exploit it while still at office.82

Only if White had resigned his

position free from intention to exploit Octopus’ business opportunity (meaning a resignation before

he even became aware of the opportunity), he would be able to escape liability for the exploitation

of a corporate opportunity. As far as the White’s duty not to exploit the information of Glasvegas’

business clients contacts that he has access to as a director is concerned, it would be irrelevant if he

had resigned before finding out about the opportunity or not, since he shall anyway be held

accountable to remedy Glasvegas plc in accordance with Part 10 of UK Companies Act 2006.

(D) Consider the legal situation if this scenario had been played out in the USA.

Public companies in the USA are traditionally regulated by the so called federal securities laws 83

and the Sarbanes-Oxley act – introduced in 2002 and enacted mainly in response to the scandals of

Enron and WorldCom failures 84

to set reforms to accounting, auditing and corporate

responsibility, changes to restrictions imposed on public companies’ directors and to amend public

companies’ disclosure and reporting rules. The regulations of Sarbanes-Oxley are followed by

separate regulations issued in 2003 by the New York Stock Exchange (NYSE), American Express

(AMEX), and National Association of Securities Dealers Automated Quotations (NASDAQ) that

required companies listed on these exchanges to satisfy further regulations designed to strengthen

corporate governance. Section 406 of the Sarbanes-Oxley provides for the requirement every US

public company “to disclose whether or not, and if not, the reason therefore, …[the company] has

adopted a code of ethics for senior financial officers, applicable to its principal financial officer and

controller, principal accounting officer, or persons performing similar functions”. The rule is

respectively implemented by the U.S. Securities And Exchange Commission on the 3rd

of March

200385

, by the NYSE in Section 303A of its Listed Company Manual and by NASDAQ in

82

Further supported by Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443 “there can be no doubt

that the defendant got his Eastern Gas Board contract for himself as a result of work which he did whilst still the

plaintiff’s managing director” 83

There are 5 particularly prominent federal securities laws:

1.Securities Act of 1933 - regulating distribution of new securities

2. Securities Exchange Act of 1934 - regulating trading securities, brokers and exchanges

3. Trust Indenture Act of 1939 - regulating debt securities

4. Investment Company Act of 1940 - regulating mutual funds

5. Investment Advisers Act of 1940 - regulating investment advisers 84

N. Basu, O. Dimitrov “Sarbanes- Oxley, governance, performance, and valuation”, (2010), Journal of Financial

Regulation and Compliance, page 32 85

Securities And Exchange Commission, Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of

2002 http://www.sec.gov/rules/final/33-8177.htm accessed 19.12.2013

16

subsection Section 5610 of its Marketplace Rules 4000 Series86

. Sarbanes-Oxley may set some

exclusive corporate governance rules, but in general in the US corporate governance is traditionally

regulated on state and not on federal level.87

Even though enabled to, the different US states’ laws

do not address all aspects of the director’s fiduciary duties except for the minor initiatives of some

US states to enact statutes on director’s conflict of interest transactions (as an aspect of the duty of

loyalty)88

and except for the codification the director’s standard of care in over 40 states.89

This

speaks for the fact that the most directors’ corporate obligations, including the duty of loyalty in

the US are mainly based on non-legislative sources which may be binding - like the

aforementioned NYSE and NASDAQ listing regulations and case law or non-binding like e.g.

corporate “best practices” manuals90

. We may conclude than, that the US courts almost fully rely

on the rules of equity and not on statutes when deciding on directors’ fiduciary duties and

especially when deciding on the duty of loyalty.91

If we assume the Glasvegas plc was registered in Delaware, US, then we should turn to Delaware

case law to consider the case scenario from a US perspective. On multiple occasions the Delaware

Supreme Court has held that corporate director’s obligations include “fiduciary duties of care,

loyalty and good faith.”92

As Jonson and Sides find out in their analysis of the US doctrine of the

duty of loyalty is not generally different from its UK counterpart, summarizing it with the

following sentence:

“A director may not engage in an unfair self-dealing (“conflict of interest”) transaction,

wrongly usurp a corporate opportunity, improperly compete with the corporation, or use

corporate assets or confidential company information for personal gain.”

Similarly to the UK standing on the matter, the US’ director may not rely on the fact that he has no

obvious personal conflict of interest with the company. As according to Johnson and Sides, the

86

NASDAQ Listing Rules, 4000 Series, http://nasdaq.cchwallstreet.com/NASDAQ/pdf/new_listing_rules.pdf accessed

03.01.2014 87

L. Johnson and M. Sides , “The Sarbanes-Oxley Act And Fiduciary Duties”, (2004), [Vol. 30:4], William Mitchell

Law Review, page 1192 88

E.g. the state of Delaware in DEL. CODE ANN. tit. 8, § 144 (2014),

http://delcode.delaware.gov/title8/c001/sc04/index.shtml accessed 02.01.2014 89

Op. Cit. L. Johnson and M. Sides, page 1193 90

Ibid. 91

Ibid. 92

For example in Malone v. Brincat, 722 A.2d 5, 11 (Del. 1998); Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156

(Del. 1995)

17

Delaware Chancery Court stated in Blasius Indus. v. Atlas Corp. 93

that “a breach of loyalty can be

unintended and can occur even when board action is taken in good faith, and even where self-

interest is absent”, and continue by citing the same court:

“a fiduciary may act disloyally for a variety of reasons other than personal pecuniary

interest; and . . . regardless of his motive, a director who consciously disregards his duties

to the corporation and its stockholders may suffer a personal judgment for monetary

damages for any harm he causes.”

For the above reasons we may conclude that Walter White’s breach of his fiduciary duty of loyalty

to Glasvegas plc might be harder for adjudication in a Delaware court as far as there are no

statutory provision on the matter of the general directors’ duties in the USA, but still the outcome

would not be materially different, since the US judge-made law covers the area of director’s

fiduciary duties in a way, quite similar to the approach of UK courts before the introduction of the

Companies Act 2006.

The treatment of shareholders rights. Measures to uphold shareholder’s rights.

Shareholders are persons (legal persons and individuals), institutions or other entity that holds

shares in a company.94

Shareholders are different than stakeholders, because they are the only to

provide risk capital to the company by investing their own funds and as consequence of their

important role most jurisdictions explicitly and statutorily regulate their rights.95

The main aim of

the British company is defined by Mallin as to maintain and enhance shareholder value.96

The

central role of shareholder’s within a company in the UK and some other countries (like the US) is

supplemented by the fact that shareholders are able to bring the company’s director to account for

his actions – this happens in the UK by application of the rules set under UK Companies Act 2006,

which has implemented EU Directive 2007/37 in Year 2009 by enactment of Regulations 2009 (SI

2009/1632).97

As part of the widely proclaimed shareholders’ activism 98

- the shareholders’ right to

93

Blasius Indus. v. Atlas Corp., 564 A.2d 651, 663 (Del. Ch. 1988); 94

C. A. Mallin, Corporate Governance, (2nd

ed, 2007, Oxford University press, Oxford), page 49 95

Ibid. 96

Ibid, page 57 97

D Milman, “Shareholder  rights: analysing the latest developments in  UK law”, (2010), Company Law Newsletter,

page 2

18

bring a derivative action against a director of a UK company is statutorily established for the first

time (as before CA 2006 derivative actions have been available under common law only) under

Part 11 of the CA 200699

. CA 2006 Part 11 allows for suit against directors for “an actual or

proposed act or omission in respect of negligence, default, breach of a duty or breach of trust”. 100

The ability of a shareholder to raise a derivative claim depends on the company’s own ability to do

so.101

Among other important shareholder rights established under CA 2006, we must mention: 1)

Requisitioning a general meeting (sections 303-305); 2) Requisitioning the circulation of a

statement (sections 314 – 317); 3) Proposing a resolution for an AGM (section 338); 4) Removing

a director from office (section 168) etc.102

Additional shareholders’ rights may be provided for in

the company’s articles of association, the terms of the issue of shares and in a shareholders’

agreement.103

Consequently from the above, a derivative claim is possible against Walter White, raised by

shareholders of both Glasvegas and Sevco 2012. He may also face removal from office at

Glasvegas plc in accordance to sec. 168 CA 2006.

Bibliography

Primary sources

Legislation

1. UK Companies Act 2006

2. Sarbanes-Oxley Act of 2002

3. Directive 2006/46/EC of 14 June 2006, O.J. (L 224) of August 16, 2006

98

“Shareholder activism - Guide to shareholders’rights”, (2012) Taylor Wessing LLP, page 1

http://www.taylorwessing.com/uploads/tx_siruplawyermanagement/Shareholder_activism_-

_Guide_to_shareholder_rights.pdf accessed 04.01.2014 99

S Baker, “Derivative actions under the Companies Act 2006: All talk, no action?”,

http://www.boyesturner.com/news-article.html?id=970 accessed 04.01.2014 100

B. Tricker, Corporate Governance: Principles, policies and practices, (2nd

ed, 2012, Oxford University Press,

Oxford), page 251 101

Op. Cit. “Shareholder activism - Guide to shareholders’rights”, (2012) Taylor Wessing LLP, page 8 102

Ibid, pages 3- 6 103

Op. Cit. B. Tricker, page 251

19

4. European Parliament and Council Directive (EC) No. 2003/71 on the Prospectus to be Published

When Securities Are to Be Offered to the Public or Admitted to Trading and amending Directive

(EC) 2001/34, O.J. (L 345) 64 of Dec. 31, 2003)

5. European Parliament and Council Directive (EC) 2004/109 on the Harmonization of Transparency

Requirements in Relation to Information About Issuers Whose Securities Are Admitted to Trading

on a Regulated Market and Amending Directive (EC) 2002/34 O.J. (L 390) 38 of Dec. 31, 2004

6. Regulation (EC) No. 1606/2002 of the European Parliament and of the Council on the Application

of International Accounting Standards, O. J. (L 243) 1 of Sept. 11, 2002

7. Directive 2007/36/EC of the European Parliament and of the Council of July 11, 2007 on the

exercise

8. of certain rights of shareholders in listed companies, O. J., L 184/17 of July 14, 2007

9. European Parliament and Council Directive (EC) No. 2006/43 of May 17, 2006, on Statutory Audits

of Annual Accounts, amending Council Directive (EEC) No. 78/660 and Council Directive (EEC)

No. 83/349/EEC and repealing Council Directive (EEC) No. 84/253, O.J. (L 157) 87 of June 9,

2006

10. Council Regulation (EC) No 2157/2001 of 8 October 2001

11. Council Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a European

company with regard to the involvement of employees

12. DEL. CODE ANN. tit. 8, § 144 (2014), http://delcode.delaware.gov/title8/c001/sc04/index.shtml

accessed 02.01.2014

Cases

1. Regal (Hastings) Ltd v Gulliver, [1967] 2 AC 134

2. Bristol and West Building Society v Mothew [1997] 2 W.L.R. 436

3. Murad v Al-Saraj [2005] EWCA Civ 959

4. Peso Silver Mines v Cropper [1966] 58 D.L.R. (2d) 1

5. Foster Bryant Surveying Ltd. v Bryant [2007] EWCA Civ 200

6. Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443;

7. CMS Dolphin Ltd v Simonet [2001] 2 BCLC 704

8. In Plus Grup Ltd v Pyke [2002] EWCA Civ 370

9. Malone v. Brincat, 722 A.2d 5, 11 (Del. 1998);

10. Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156 (Del. 1995)

20

11. Blasius Indus. v. Atlas Corp., 564 A.2d 651, 663 (Del. Ch. 1988);

Secondary sources

Books

1. K. J. Hopt, ‘Comparative Company Law’, in: M. Reimann, R. Zimmermann, eds., The Oxford

Handbook of Comparative Law, (Oxford University Press, Oxford, 2006)

2. D French, S Mayson and C Ryan, Mayson, French and Ryan on Company Law, (11th Ed, Oxford

University Press, Oxford, 2010)

3. P. Davies, K. Hopt, R. Nowak and G. van Solinge, ‘Boards in Law and Practice: A Cross-Country

Analysis in Europe’, in: P. Davies, K. Hopt, R. Nowak and G. van Solinge (Forum Europaeum

Corporate Boards), eds., Corporate Boards in European Law: A Comparative Analysis, (Oxford

University Press, Oxford, 2013)

4. S. Summerfield, R. Woodburn & L. Brocklehurst, T Smith (ed.), Company Directors, Jurisdictional

comparisons (1st Ed, Sweet & Maxell, 2012)

5. P. L. Davies and Sarah Worthington in Gower and Davies: Principles of Modern Company Law,

(8th ed., Thomson, Sweet & Maxwell, London, 2012)

6. F. Scott Kieff, Perspectives on Corporate Governance (Cambridge University Press, 2010)

7. K Smith and D Keenan, Smith & Keenan’s Company law, (13th ed, Pearson Longman, 2005)

8. B. Tricker, Corporate Governance: Principles, policies and practices, (2nd

ed, 2012, Oxford

University Press, Oxford)

9. C. A. Mallin, Corporate Governance, (2nd

ed, 2007, Oxford University press, Oxford)

Journal articles

1. D. Lewis, “Whistleblowing in a changing legal climate: is it time to revisit our approach to trust and

loyalty at the workplace?” (2011), 20(1), Business Ethics: A European Review, page 71-87

2. K. J. Hopt, “Conflict of Interest, Secrecy and Insider Information of Directors, A Comparative

Analysis”, (2013), vol. 2, ECFR, page 169

3. D. C. Skinner, “Director Responsibilities And Liability Exposure In The Era Of Sarbanes-Oxley”,

(2006), The Practical Lawyer, <http://www.myilibrary.com?ID=272358> accessed 23.12.2013

4. M. Belcredi, G. Ferrarini, “The European Corporate Governance Framework:Issues and

Perspectives”, (2013), ECGI Working Paper Series in Law, Paper N°. 214/2013, page 4,

http://ssrn.com/abstract=2264990 accessed 02.01.2014

5. N. Basu, O. Dimitrov “Sarbanes- Oxley, governance, performance, and valuation”, (2010), Journal

of Financial Regulation and Compliance,

21

6. L. Johnson and M. Sides , “The Sarbanes-Oxley Act And Fiduciary Duties”, (2004), [Vol. 30:4],

William Mitchell Law Review, page 1192

7. D Milman, “Shareholder  rights: analysing the latest developments in  UK law”, (2010), Company

Law Newsletter

Other resources

1. C. G.-Beuerle, P. Paech and E. P. Schuster, Study on Directors’ Duties and Liability, (LSE

Enterprise, London, 2013), http://ec.europa.eu/internal_market/company/docs/board/2013-study-

analysis_en.pdf, accessed 20.12.2013

2. C. G.-Beuerle, P. Paech and E. P. Schuster, Annex to Study on Directors’ Duties and Liability,

(LSE Enterprise, London, 2013), http://ec.europa.eu/internal_market/company/docs/board/2013-

study-reports_en.pdf accessed 31.12.2013

3. The UK Financial reporting council on Corporate Governance,

http://www.frc.org.uk/corporate/ukcgcode.cfm accessed 22.12.2013

4. Modernising Company Law and Enhancing Corporate Governance in the European Union – A Plan

to Move Forward, COM (2003) 284 final (May 21, 2003).

5. European Commission proposal for amending the Accounting Directives - Frequently Asked

Questions European Commission - MEMO/04/246 of 28/10/2004 http://europa.eu/rapid/press-

release_MEMO-04-246_en.htm, accessed 22.12.2013

6. NASDAQ Listing Rules, 4000 Series,

http://nasdaq.cchwallstreet.com/NASDAQ/pdf/new_listing_rules.pdf accessed 03.01.2014

7. The EU Single Market thematic website on EUROPA.

http://ec.europa.eu/internal_market/company/societas-europeae/index_en.htm accessed 01.01.2014

8. Report From The Commission To The European Parliament And The Council On The application

of Council Regulation 2157/2001 of 8 October 2001 on the Statute for a European Company (SE),

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52010DC0676:EN:NOT accessed

02.01.2014

9. Securities And Exchange Commission, Disclosure Required by Sections 406 and 407 of the

Sarbanes-Oxley Act of 2002 http://www.sec.gov/rules/final/33-8177.htm accessed 19.12.2013

10. “Shareholder activism - Guide to shareholders’rights”, (2012) Taylor Wessing LLP, page 1

http://www.taylorwessing.com/uploads/tx_siruplawyermanagement/Shareholder_activism_Guide_t

o_shareholder_rights.pdf accessed 04.01.2014

11. S Baker, “Derivative actions under the Companies Act 2006: All talk, no action?”,

http://www.boyesturner.com/news-article.html?id=970 accessed 04.01.2014