Topics Covered in this article
Directors’ fiduciary responsibilities were first established by common law judges who were not guided by any specific written law. Indeed, the central fiduciary obligations of care and allegiance are not mentioned at all in the company laws of the United States and many other common law jurisdictions. The fiduciary responsibilities of directors are still evolving, despite the lack of a specific written statute.
Fiduciaries often have a duty of good faith, which requires them to behave in an honest and forthright manner, without manipulating or exploiting their clients. Any commercial transaction involves a fiduciary relationship. Furthermore, the agent’s particular position or duty against the principal defines the relationship i.e., the relationship of corporate management and boards of directors to shareholders, lawyer to client, or broker to client, and governed by the laws associated with those transactions.
When two people have a fiduciary relationship, one is obligated to protect the interests of the other, and if the former takes advantage of that relationship to achieve an unjust enrichment or benefit from another, it violates the ethos of fiduciary duty. A director’s fiduciary obligation is comparable to the obligations owed to a beneficiary by a trustee. The directors, as trustees, are obligated to behave in the best interests of their beneficiary, the corporation or its stakeholders. The general rule is that there is no fiduciary relationship between a director and a shareholder; it only exists between the corporation and the director.
This is an appeal about the alleged breach of a director’s fiduciary duties during a period of notice after he had resigned as a director but when his resignation had not yet taken effect. The director, Mr Graham Bryant, is the respondent had been essentially pushed out of the company by his business partner and co-director, who was the largest shareholder in the company, Mr Mark Foster, the appellant and claimant below.
Facts of the Case
The turning point came when Mr Foster abruptly informed Mr Bryant that his wife, who was employed by the company, would be laid off. It is therefore not the case that Mr Bryant resigned in order to steal work or clients from the company. Nonetheless, the company’s client, if not only, client during the notice span (Alliance Leisure Services Limited) pressed Mr Bryant to continue to play a role for that client after his departure from the company.
In its own best interests, the client desired stability in its current or future ventures. Mr Bryant, who had been looking for work in the meantime, decided to comply with the client’s wishes. Mr Bryant’s position, as envisioned by the client, was essentially that of an employee, in which he would focus solely on the client’s affairs. However, it was agreed that this agreement would take the form of him providing his services to the client through his own new business.
The customer will cover all of the new company’s costs as well as a “salary.” As a result, neither Mr Bryant’s nor the company’s remuneration was to be dependent on projects or fees. Mr Bryant’s new company was established just a few days before he resigned. He began working for the client after it became successful. Previously, the client had entrusted all of its work to the firm under an exclusivity agreement that had expired without renewal only weeks before the resignation took effect.
Mr Foster, the other director, was aware that the client desired Mr Bryant’s services, but he tried to reassure the client that the company could have continuity by hiring outside help to serve the client. In other words, the firm desired to contract out, or subcontract, its work. The customer, on the other hand, did not want this.
It was quite pleased with the personal and technical surveying work that the two co-directors had done for it. It desired that each director continue to provide the personal service that it desired and for which it had previously rewarded the company with its patronage.If the two directors were no longer able to work together in the same business, current or potential project work would have to be spread out between them in order for either of them to be occupied for 100% of their time.
The client presented each of them with this idea. Mr Bryant was willing to go along with it, but Mr Foster was not. He turned down the offer, stating that he preferred to cover the client’s work via an outside contractor and that he was unable to continue doing just as much work for the client as he could personally provide. When the corporation sued the customer, there was a final breach between the two parties. It also filed a lawsuit against the departing director. The conflict between the company and the customer has been resolved, but the case between the former co-directors is still ongoing. It’s became a nightmare for both of them.
Mr Bryant’s fiduciary obligations had not been breached, according to the decision of the judge in the Lower courts. The judge observed that following his resignation, he discovered that he had been removed from his position as director. He also discovered that, even though he had violated his fiduciary obligation, the corporation had incurred no financial loss as a result.
It wasn’t a case of Mr Foster spotting a ripe business opportunity, or even a potential business opportunity, and attempting to steal it. Rather, it was a customer-led effort aimed at identifying a solution to the issue resulting from Mr. and Mrs. Bryant’s departure from the company that was satisfactory to the customer Alliance. Further in the lower it courts it was held that In the circumstances of this case, it seems that Mr Bryant did not violate his fiduciary duties to the Company by agreeing to Mrs Watts’ recommendations that he should form his own company and then take on whatever work Alliance was willing to offer him.
Hence the present appeal.
The issue that has arisen for the consideration before court is that;
“Whether the director has violated his fiduciary duties?”
Decision of the Court
The court concluded that Mr Bryant’s resignation had no ulterior motive based on the material facts and circumstances. In human words, and despite the fact that the shareholders’ agreement was not repudiated, Mr Foster’s aggressive and truculent demeanour, as well as Mrs Bryant’s dismissal, compelled him to do so. At that time his intention was to find employment with a firm of chartered surveyors, in other words to retrace his steps.
Mr Bryant did nothing more than consent to be retained by Alliance after his resignation took effect. He didn’t do anything else. His resignation was not made with a hidden agenda in mind. He didn’t ask Alliance for a job, a retainer, or some other company. It was pressed upon him rather than given to him.
In his case, where his resignation had already been tendered and was irreversible, accepting Mrs Watts’ proposal seemed to me to be no different than (at worst) putting in place train arrangements for future competition after his resignation had become completely operational and he had ceased all ties with the company.
As a result, the court determined that Mr Bryant’s resignation was free of any disloyalty or conflict of interest, that his acceptance of a potential job offer was also free of conflict of interest, and that no property or maturing business opportunity was taken or abused by Mr Bryant.
Henceforth the appeal was dismissed.
It becomes partitional to analyse the relationship Mr. Foster, Bryant and the Client shared so as to get a clear picture of the present case. Mr Foster and Mr Bryant are chartered surveyors and members of the Royal Institution of Chartered Surveyors (RICS). Both were hired by separate surveying companies in early 2002. Mr Foster’s firm had Alliance as a client. Mrs Watts, Alliance’s managing director, has led the company since its inception in 1992. As a facilitator and manager of leisure ventures, it has proven to be competitive such as the construction and equipping of sports centres, swimming pools, gymnasia and the like, principally by local authorities.
Mr Foster was dealt with by Alliance at the company where he worked. Mr Foster approached Mrs Watts and asked if she would be willing to help him with Alliance’s project management work if he quit his job and started his own company. As a result, he quit his job and, in May 2002, founded Foster Surveying Consultancy Ltd, as the first appellant was known at the time. Even before that time Mr Foster had asked Mr Bryant, whom he knew, if he would like to join him in such a venture, but Mr Bryant then declined.
At first Alliance supported Mr Foster’s company on an ad hoc basis, Mrs Watts was obviously pleased with the service offered, so in January 2003 she agreed to Mr Foster’s plan for a two-year contract (calendar 2003 and 2004) in which the company would have exclusive access to Alliance’s surveying and project management work (the “exclusivity agreement”). It called for a study after the two-year cycle ended. It was contingent on the organisation “maintaining sufficient levels of capital to efficiently handle projects and sustain a high quality of operation.
Meanwhile, Mr Foster approached Mr Bryant again in late October 2002, proposing a “partnership deal” in which Mr Bryant would enter the company in February 2003 and obtain 40% of its shares (in exchange for operating for 5 months without pay), with the possibility of increasing to 50% if the company prospered.
Mrs Foster, the company’s only other employee at the time, handled secretarial and administrative duties. Mr Bryant was enticed by the plan, which culminated in a Shareholders’ Agreement signed on December 20, 2003 (after a long period of time).
Meanwhile, he had started working for the company in February 2003 and had worked for nearly 5 months without pay to earn his shares, as promised. Foster Bryant Surveying Ltd became the company’s new name in June 2003.
Furthermore, a fiduciary relationship ends until the relationship that gave rise to it has been determined. After the relationship is established, the director is generally free of the ongoing responsibilities that characterise a fiduciary relationship.Acts performed by the directors when the employment contract is in effect but in preparation for competition after it ends are not inherently a violation of the implied term of allegiance and fidelity.
When determining if a director’s behaviour violates the preceding concept, consider the director’s role or office, the existence of the corporate opportunity, its ripeness, specificity, and the director’s relationship to it, the amount of information possessed, the circumstances under which it was obtained, and whether it was exceptional or even private, the factor of time in the continuation of the fiduciary duty where the alleged breach occurs after termination of the relationship with the Company and the circumstances under which the breach was terminated, that is whether by retirement or resignation or discharge should be taken into account.
Furthermore, the fundamental basis of a director’s responsibility for exploiting a maturing business opportunity of the Company after his departure is that the opportunity must be handled as though it were the Company’s property in relation to which the director had fiduciary duties. He is appropriating the property by trying to leverage the incentive after his resignation. He is just as accountable as a trustee who retires without properly accounting for trust property.
In terms of breach of trust, while a director or other employee must not use confidential information to the detriment of his employer while the contract of employment is in effect, once it ends, the director/employee may compete and use know-how gained during his employment (as opposed to trade secrets).
Therefore, in the present case, the Director who reigned from the job did not have any fiduciary duty to his erstwhile company and he cannot be held accountable for the same.