Company Law

AC208 Company Law Assignment

Name : Wong Kai Jun

Tutorial Group : T14

Tutor : Assoc/P Gan Lay Hong, Pauline

Company Law Assignment

The law requires that directors not take corporate opportunities without the permission of the company. The first part of the essay will touch on the ambit of this duty, and then I will go on to discuss whether the law imposes too harsh a burden on directors in this regard.

First of all, "corporate opportunity" refers to a business opportunity which the company is considering or one which the company might be reasonably expected to be interested, given its current line of business.

An example of a director breaching her duty by taking a corporate opportunity is given in the Compaq case. Compaq had arranged to engage Personal Automation Mart for its "GEMS" project. However, an internal dispute arose between Tan - Compaq's managing director - and the majority shareholder. This dispute prompted Tan to resign, and she brought along some of the Compaq's employees who assisted in the GEMS project to set up another company Newstead. Personal Automation Mart later transferred the project to Newstead. The court held that Tan breached her fiduciary duties by setting up a competing firm to take advantage of a contract that should have gone to the company.

The above case also leads one to ponder, since directors are not allowed to take corporate opportunities without the permission of the company, can the director resign from the company to take up a corporate opportunity? Will his liability be absolved then?

The courts have held that when directors resign from a company to take up a corporate opportunity, he will breach his duty by taking up the opportunity without the permission of the company where:

1. The resignation was prompted or influenced by a desire to acquire the opportunity sought by the company or

2. it was the director's position with the company rather than a new initiative that led the director to the opportunity which the director later acquired.

The above principal is clearly illustrated in the Canadian Aero Service case. In this case, O'Malley and Zarzycki - both officers of Canadian Aero Service - resigned from Canadian Aero and set up Terra Surveys Ltd. Terra Survey ultimately succeeded in obtaining the contract - which Canadian Aero had wanted - for topographical mapping in Guyana. Canadian Aero sued, and the court held that both of them breached their duty. Even though they had resigned from Canadian Aero, it was their positions with Canadian Aero rather than any new initiatives that led them to the corporate opportunity which they later acquired.

What if the company is unable to take up the corporate opportunity? Will the directors be allowed to take up the corporate opportunity then? There are two opposing views with regards to this circumstance. These different views are illustrated in the Peso Silver Mines Ltd case and the Regal (Hastings) Ltd case.

In Peso Silver Mines case, a prospector approached Peso to buy some of his mining claims. Peso's board of director rejected the offer after consideration. Cropper was a member of the board of Peso when the offer was considered and rejected. Later, Cropper formed a syndicate to acquire the claims which had been first offered to Peso. Peso's control changed sometime later and Cropper was dismissed. Peso sued Cropper for breach of duty and the court held that Cropper had not breached his duty. This is so because Peso had, for good commercial reasons, rejected the offer made to it by the prospector. Cropper was not in a position of conflict of interest and duty because Peso had decided it had no interest in these mining claims.

The Peso case suggests that a director can take up an opportunity that the rest of the board, in good faith has decided not to pursue. The opportunity no longer belongs to the company as the board has decided to abandon it.

However, in the Regal (Hastings) Ltd case, the court held otherwise.

The directors of Regal decided to acquire leases of two other cinemas and form a subsidiary - Hastings Amalgamated Cinemas Ltd - for the purposes of acquisition. The owner of the two cinemas required that the capital of Hastings Amalgamated be at least Ј5000. Regal could only afford to invest Ј2000 in Hastings Amalgamated, henceforth; its four directors invested Ј500 each in Hastings Amalgamated and they got the solicitor to invest another Ј500. Gulliver the chairperson also invested Ј500, though he did not do it personally. These six officers were issued Hastings Amalgamated shares in return. Later, all of the shares in Regal and Hastings Amalgamated were sold to a new owner, and the six officers who had a stake in Hastings Amalgamated made a profit from the sale of shares. The new owner sued them.

The court held that the four directors breached their duties. They had taken an opportunity (which was to make a very profitable investment in the shares of Hastings Amalgamated) with the result that the shareholders of Regal received a reduced proportion of the sale price of Hastings Amalgamated. Just because Regal had insufficient financial resources to invest more than Ј2000 in shares of Hastings Amalgamated, does not justify the directors' act of taking a corporate opportunity. The principal underlying this decision is