UK Court Says Directors Owed Duty of Loyalty with Regard to Investment Property

In a significant opinion involving the fiduciary duties of directors, A UK appeals court has ruled that directors violated their duty of loyalty to the company when they personally purchased investment property that came to their attention in their capacity as directors of the company acting on the company's business and using information they obtained in the course of so acting. The fiduciary duties of company directors are not circumscribed by contract, emphasized the court, and are essentially unlimited, akin to a general trusteeship. . O’Donnell v. Shanahan, Court of Appeal, July 22, 2009.

Their proper course was to obtain the company's informed consent to their private venture, said the court, which they did not do. This was an opportunity belonging to the company and, in acquiring it in the way they did, the directors were in breach of fiduciary duties to act only in the company's best interests, not to place themselves in a position of a conflict of interest and not to take for themselves business opportunities that were properly those of the company. It may have been improbable that the company could or would want or be able to take up the opportunity itself.

But the opportunity was there for the company to consider and, if so advised, to reject and it was no answer to the claimed breach that property investment was something that the company did not do. A scope of business inquiry will not be strictly applied. It is not for directors to make their own decisions that the company will not be interested and to proceed, without more, to appropriate the opportunity for themselves. Their duty is one of undivided loyalty and this is one manifestation of how that duty is required to be discharged. If an opportunity comes to directors in their capacity as fiduciaries, their principal is entitled to know about it.

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