By Nursyafikha Kamarrudin
When discussing the acquisition of business opportunities, there is often a misconception that directors may personally benefit from opportunities that are, in substance, meant for the company or diverting the business opportunities of the company. This is especially common where directors are also active businessmen in their own right. However, this gives rise to a very thin and often blurred line between the director’s personal capacity and their fiduciary role within the company.
This is very crucial for us to understand, as the different legal entities between the directors and the company itself need to always be carefully observed since the failure to recognise and uphold this separation may result in a conflict of interest, where a director’s personal interests are placed in competition with, or preferred over, the interests of the company itself.
Improper Use of Positions
Section 218 (1)(d) of the Companies Act 2016 had already laid down that the director should not, without the consent or ratification of the general meeting, use any opportunity of the company which he became aware of, in the performance of his functions as the director or officer of the company. From this section, it can be understood that the director cannot use the business opportunity of his company for his own benefit. The law is really clear on that to avoid the conflict of interest that occurred in the company administration.
To further illustrate the breach of the director’s duty by diverting the business opportunity of the company, we can refer to the case of Cooks v Deeks. Toronto Co. had four directors holding a quarter of shares each, building several railway lines for the Canadian Pacific Railway Co. where two of the directors started a negotiation with Canadian Pacific Railway for the new construction of the railway line whereby they claimed that they were acting on behalf of the company. When the contract was awarded to them, they incorporated a new company, Dominion Co. The said directors and another director convened a general meeting to pass a shareholder resolution that Toronto did not have any interest; thus, the plaintiff sued the directors.
The court ruled that the directors had breached their duty by placing their personal interests above their duty to the company. This is due to the fact that the director used Toronto’s opportunity to secure the new construction of the railway line project with Canadian Pacific Railway Co. to divert this opportunity or exploit it for his own newly constructed company. Conflict of interest is created between the directors and the company when there exists a diversion of the business opportunity by its own directors.
However, the primary question here is how to determine whether the business opportunity was given for the personal capacity of the director or for the business opportunity of the company?
Concept of Business Opportunity of the Company
There are two tests that we can apply: first, the maturing business opportunity test and the current line of business test. Firstly, the maturing business opportunity test is where we will observe whether the company is actively seeking the business opportunity or was in negotiation regarding the contract or opportunity. Secondly, the current line of business test can be understood as where the company reasonably adapted itself to pursue the opportunity now or in the reasonable future.
We can choose from one of these tests to determine whether the business opportunity is for the company or not. Nevertheless, in this article, we will be focusing on understanding the maturing business opportunity.
The landmark case that discussed the rules of the maturing business opportunity test is the case of Canadian Aero Service Lt v O’Malley et al. In fact, the rule laid down, in this case, had already been referred to in the decision of the Singaporean case, which is Innovative Corp Pte Ltd v Ow Chun Ming and Anor, and also the Malaysia case, which is Karisma Wira (M) Sdn Bhd v Salleh bin Abdul Majid and Anor.
The material facts of the case revolved around the plaintiff company, which was in the business of topographical mapping, and had been seeking for some years a contract with the Canadian government for the mapping of Guyana under the Canadian external aid programme. The defendants were the president and chief executive officer, a director, and an executive vice president. They were the ones dealing with all the preparatory work in procuring the contract. Before any contract was concluded, both resigned from the company. However, just before they resigned, they had formed a company which later obtained the same contract that the plaintiff’s company was pursuing. The directors were held liable for breach of fiduciary duties.
The rules laid down in this case that can be highlighted is the way to determine whether the business opportunity is the business opportunity of the company or not. Firstly, there must be a maturing business opportunity. Secondly, the company must have been actively pursuing that opportunity; lastly, the director’s resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself.
If all of these rules are fulfilled, it can be deemed that it is indeed a business opportunity of the company and the directors cannot divert the business opportunity for their own personal gains.
Directors intentionally resign to appropriate corporate opportunities
In relation to that, it can be inferred from these rules that, although the director is said to have resigned from the company, he still cannot intentionally resign from his position in the company to acquire the business opportunity that he knew from his function as a director for himself.
This was also further reiterated in the ruling given by Roskill J in the case of Industrial Development Consultants Ltd v Cooley where it mentioned that the duties which were attached to the director when he held the office did not cease to exist upon his release from directorship in respect of information and opportunities obtained when he was a director. Therefore, it can be deemed that the duty of the director to not use the business opportunity of the company persists even after his resignation.
However, there is an exception. In the circumstances where the business opportunity will no longer or will not be considered as a business opportunity of the company, it allows the director to acquire the opportunity.
For instance, if the company had already made a negotiation regarding the business or project and the company rejected the opportunity, it can be deemed that there is no maturing business opportunity as the company did not actively seek it and the negotiation had failed. This showed that it is not a business opportunity of the company.
This was extensively discussed in the case of Peso Silver Mines Ltd v Cropper, where Cropper was an active director of Peso. Dickson, a prospector, approached the company with an offer to acquire a mining claim. The Peso Board considered the offer but rejected it in good faith. Sometime later, Dickson approached Cropper with the offer. Cropper and Dickson formed a company to manage the claim. Ultimately, the court in this case ruled that Cropper was not in breach of his duty as the company had already rejected the offer.
Once the company considers and rejects an opportunity in good faith, it ceases to fall under the doctrine of corporate opportunity, and the director is free to pursue it. From this principle, it can be seen that once there is a company’s refusal or rejection, it cannot be considered as a business opportunity for the company anymore, and the director would not be deemed as breaching his duty if he used the said opportunity.
Conclusion
In conclusion, the doctrine of the corporate opportunity is indeed vital to safeguard the interests of the company and to avoid conflicts of interest within the walls of the company’s administration. It reinforces the director to prioritise acting in the best interests of the company and must not exploit opportunities that properly belong to the company for personal gain. At the same time, the law also recognises that not every opportunity encountered by a director automatically belongs to the company. By maintaining this separation between personal interest and corporate responsibility, it can be seen that the law seeks to ensure transparency, prevent abuse of power, and uphold confidence in corporate governance.
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