Diversion of corporate opportunity

Two recent cases on diversion of corporate opportunities highlight:

• The strictness of the equitable rule; and
  
• The importance of the facts in determining whether it has been breached.
  

The two cases are the decision of the Supreme Court of New South Wales in Manildra Laboratories Ltd v Campbell
[2009] NSWSC 987 and the decision of the English Court of Appeal in O'Donnell v Shanahan
[2009] EWCA Civ 751.

O'Donnell v Shanahan

This case concerned a quasi-partnership company which at the time of these events had three director/shareholders. The key transaction complained of related to the engagement by the company to find a purchaser for a property called Aria House. The initial purchaser pulled out of the transaction at a late stage. In an attempt to salvage the deal, the defendants approached a client of the company, Mr Holleran. He expressed interest in buying a 50% interest in the property, but only on the basis that the defendants would take the other 50% stake. Mr Holleran was also not prepared to pay the £30,000 commission to the company that was part of the original deal.

At first instance, the judge had found that proceeding with this transaction was not a breach of duty by the defendants because there was no suggestion that the company might buy the property and because purchasing property fell outside the scope of the company's business. In reaching this conclusion the judge relied on Aas v Benham [1891] 2 Ch 244. In that case, a partner was free to exploit information he obtained as a partner in the firm where the opportunity did not compete with and was beyond the scope of the business of the partnership.

That decision was reversed on appeal. For Rimer LJ, with whom the other members of the Court of Appeal agreed, the critical fact was that the defendants had obtained the information in the course of acting as directors of the company. The court also distinguished trusts and companies on the one hand from partnerships and held that there was no support for a "scope of business" exception in relation to the application of the "no profit" rule to companies. In the case of a partnership, the extent of a partner's fiduciary duties is determined by the nature of the partnership business. In contrast, the authorities about directors' fiduciary duties "make it clear that any inquiry as to whether the company could, would or might have taken up the opportunity itself is irrelevant; so also, therefore, must be a 'scope of business' inquiry". (para 70).

Manildra Laboratories Ltd v Campbell

This was a case where senior manager who left his employment and established a competing business was found not to have breached his fiduciary duty to his former employer. Mr Campbell was the manager of a flour mill owned by Manildra. He later left that employment, completed the purchase of a flour mill (negotiations for which had commenced while he was an employee of Manildra) and began exporting wheat flour to Indonesia. It was also found that he had approached Manildra's employees to join his new venture while he was still employed by Manildra.

The court formulated Mr Campbell's duties in virtually identical terms to the Court of Appeal in O'Donnell's case. However, it also pointed out the importance of assessing the existence and scope of fiduciary obligations in their context. The court found as follows:

• It is not necessarily a breach of duty if during the course of employment the defendant prepares to compete with their employer once the employment comes to an end. It will only be a breach if some or all of the steps taken involve a breach of duty, not because, collectively, they can be described as "preparing to compete".
  
• Purchasing the flour mill was not a breach of duty because Mr Campbell did not become aware of the possible availability of the mill through any aspect of his duties or responsibilities as an employee of Manildra, and it was not part of his responsibilities to seek out opportunities for Manildra to grow by acquiring competitive businesses.
  
• It was not a breach of duty to compete with Manildra in selling flour to Indonesia after his employment ceased. Manildra's capacity to sell flour into that market was limited by its own internal decision to sell the bulk of its flour for ethanol production, and Mr Campbell did not take part in that decision. Mr Campbell had also not diverted or usurped any of Manildra's contracts for the sale of flour in Indonesia. Rather, the court classified Mr Campbell's knowledge of the Indonesian market and potential customers within it as part of his general stock of knowledge or know-how.
  
• To the extent that the business plan that Mr Campbell developed embodied knowledge or experience gained by Mr Campbell in the course of his employment, it was not something that was capable of protection in equity. The information, though notionally confidential, fell into the category of information which was capable of being reverse engineered by a person with Mr Campbell's substantial industry experience rather than being a secret formula or process.
  
• Although Mr Campbell did approach Manildra's staff while still employed by Manildra, there was no suggestion that Manildra had suffered substantial damage as a result. At most there was an entitlement to some nominal amount of damages for breach of contract.
  

In light of the court's finding that there was no breach of fiduciary duty and no breach of contract in relation to confidential information, the court also found that there was no contravention of sections 182 or 183 of the Corporations Act.

Comment

It is possible for companies to limit their activities by specifying objects in their constitutions. Query whether if a company did this, it would operate in the same way as regards fiduciary duties as the limitation on the scope of the business of the partnership in Aas v Benham.