Court confirms implied authorisation of directors' conflicts

Court confirms implied authorisation of directors' conflicts

Published:

Author: Ben Turner

In a recent case Richmond Pharmacology Limited v Chester Overseas Limited and others, which examined breach of confidentiality obligations, the High Court was willing to imply authorisation of directors' conflicts of interest under the Companies Act 2006.

About the case

Chester Overseas Limited held 44% of the shares in Richmond Pharmacology Limited, a contract research organisation specialising in the design and conduct of pharmaceutical clinical trials. The original founders of Richmond held the balance of the shares.

Chester, Richmond and the original founders entered into a shareholders' agreement (Agreement) which contained confidentiality obligations, requiring the parties to 'treat as strictly confidential' all commercially sensitive information relating to the Agreement and the affairs of Richmond. Disclosure of confidential information to 'professional advisers' was permitted, provided the person making the disclosure procured that such advisers also treat the information as confidential.

Chester decided to sell its stake in Richmond and engaged a corporate finance adviser to whom it provided confidential information about Richmond. The advisers disclosed the information to potential purchasers, albeit after having secured non-disclosure agreements between those potential purchasers and Chester.

Richmond alleged that the disclosure caused a substantial loss of business, profits and turnover and brought a claim against Chester and the two investor directors appointed by Chester. Amongst other matters, the claim included breach of the Agreement on the part of Chester and breach of the directors' statutory duties.

Breach of statutory duties

The court examined whether the investor directors had breached their duty, under section 175 of the Act, to avoid a conflict of interest.

The fact that the investor directors acted both as directors of Richmond and representatives of Chester was, in itself, a potential conflict of interest, although the entry into the Agreement impliedly authorised them to act in such a dual capacity. This implied authority only extended so long as Chester complied with its obligations under the Agreement. To the extent that the investor directors proposed to cause Chester to commit a breach of the Agreement, further express authority would be required.

The court did not accept that, if a conflict situation arose in circumstances where Chester was acting in pursuance of its rights under the Agreement, the investor directors would require approval from the board to continue to act as directors of Richmond.

Breach of confidentiality

The court found that the disclosure of confidential information to the corporate finance advisers did not, in itself, constitute a breach of duty of confidentiality.

However, the court agreed that some information which was disclosed by the corporate finance advisers to potential purchasers was of a confidential nature, including a statement which was false. This placed Chester in breach of the Agreement.

In assessing whether the disclosure of confidential information in this way had caused the investor directors to be in breach of their statutory duties, the court held that there had been no breach of:

  • section 172 (the duty to act in a way they consider, in good faith, would be most likely to promote the success of Richmond for the benefit of its members as a whole). The court was satisfied that, having been open about their intention to market the shares and disclose the information under a non-disclosure agreement, there was no bad faith in their actions
  • section 174 (the duty to exercise reasonable care, skill and diligence). The court found that the investor directors could reasonably have formed the view that they were entitled to direct Chester to market the shares in that way

As Chester had breached the confidentiality obligations under the Agreement, it followed that the investor directors were in breach of their section 175 conflicts of interest duty. The authorisation to act in a dual capacity did not extend to their role in causing Chester to commit such a breach.

Further, the court confirmed that acting in good faith or acting reasonably, which had provided a defence to the alleged breaches of section 172 and 174, was no defence to a breach of section 175.

Comment

The willingness of the courts, in some circumstances, to imply authorisation of a conflict of interest under section 175 is interesting. However, it is not something which should be relied on in isolation. Express, well-drafted approval of conflicts of interest provisions remain best practice.

The case also emphasises the importance of understanding the extent of confidentiality obligations. Ensure that any intended disclosure is within the permitted actions set out in the confidentiality provisions and, if not, seek express permission before making the disclosure.

Disclaimer

This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.