To all those reading this I am David Gibbs; I am a Lecturer in Company and Commercial Law at the University of Hertfordshire.

I created this blog as a general out-let of ideas for my research, as well as keeping those interested up-to-date on my research and general interests.

I completed my PhD thesis at the University of East Anglia in 2014. The thesis was recommended for the award of PhD with no corrections. My external examiner was Prof. Simon Deakin (Cambridge) and internal examiner was Prof. Morten Hviid.
My PhD research centred on directors' duties and company law. The thesis was titled 'Non-Executive Self-Interest: Fiduciary Duties and Corporate Governance'. It was a doctrinal and empirical study on whether self-interest was suitably controlled amongst non-executive directors.

My supervisors were Prof. Mathias Siems, Prof. Duncan Sheehan, Dr. Sara Connolly and Dr. Rob Heywood

All opinions of any existing or future blogpost are my own. They do not necessarily represent the views of any of my associated institutions.
ORCID 0000-0002-6596-8536

Wednesday, 8 June 2016

Fiduciary Duties of Non-Executive Directors and Capacity

It has been a while since I focused on this topic. Today I returned to it reading an article on the topic by Witney, 'Corporate Opportunities Law on the Non-Executive Director (2016) 16(1) JCLS 145.

The work cites my piece in the Company Lawyer that seeks to explain that a fiduciary duty of a director is often misunderstood because people struggle to grasp that an executive director generally takes responsibility for all interests of the company, which are broadly defined because a company cannot act by itself. It is completely reliant on its directors. But people look to narrow the interests of the company and focus on defining its interests rather than what the director takes responsibility for, which is the orthodox for fiduciaries. Thus, they seek to change the fiduciary jurisdiction and apply it differently to all directors than they would to other types of fiduciaries because they look to focus on the interests of the principal rather than what interests the director is responsible for.

Whilst it is possible to vary when it is owed, as the article explains by focusing on the scope, it is not possible to change the application of the duty once it is owed. Duties, including fiduciary ones, are monolithic. They cannot be varied once owed. They are inflexible, not flexible as Witney claims. Only when they apply is flexible because, as my article shows, it depends on what the fiduciary has responsibility for to the principal's interests.

The argued changes to application of fiduciary duties for directors, as a result of that confusion, comes in many different forms, that this article tries to advance with little plausible justification for it. For one, there is no such thing as corporate opportunities law. There is no such doctrine in the UK. He tries to use this to explain that the capacity you are acting in can affect whether you can avoid the application of fiduciary duties. That is also not possible. It shows a complete disregard for the meaning of loyalty. The purpose of the duty of loyalty is to regulate self-interest within the scope of the undertaking to the principal's interests. It bans self-interest to fulfil this purpose and demands loyalty to the principal's interests that you are responsible for. This is because the director stands in the stronger position, capable of manipulating information to prefer their own interests ahead of the ones they undertook to act for. It is therefore complete fiction that the capacity you are acting in affects the fiduciary duty. The idea that we can simply argue we were acting in a personal capacity to avoid acting for the interests you undertook to protect is a complete disregard for the duty. His example given, that it is none of the company's business to be offered investment opportunities that the director invests in personally, is just one way the duty could be abused and undermine that purpose. Witney offers no justification as to why it would not be a breach other than 'capacity' (I note he cites a couple of cases where there has been no breach of duty such as CMS Dolphin, Plus Group v Pyke, and West Coast Capital but all have been misapplied as to why there was no breach in those instances, I return to one example below). On that ground I could argue any conflicting investment was not conflicting simply because I was acting in a personal capacity. The duty of loyalty is strict in its application. Is there a risk of conflict i.e. did your personal interest conflict with the interests of the company you undertook to protect? If yes, there is a breach. Capacity is not an excuse and never has been. The flexibility Witney refers to is misapplied to fit his thesis. The flexibility is when the duty is owed, not how it is applied.

To return to the cases he cites, mentioned above: He says these cases show that it is clear that a director is not bound by their duties all the time. Is it? But consider Plus Group v Pyke and CMS Dolphin that are glossed over to advance his thesis. Of course a director can resign even though it would be harmful to the business. But there is clearly no conflict of interest in resigning. What interest is he acting in conflict with by resigning? None. But take the example further. The director resigns to take an opportunity personally. If the director has responsibility for the interest that is a conflict of interests. He is still well within his right to resign but his motivation makes it a breach because he is doing it due to a conflict of interests. It has nothing to do with his capacity.

Thus Witney misunderstands what I said when I advance that a court needs to consider what the director has responsibility for. He says this is only one relevant factor in determining whether the duty was owed as a director cannot unilaterally determine the scope of their duty. No, it is the only factor in determining the scope initially, because there are no constructive fiduciaries and yes, they cannot unilaterally determine the scope of duty as much as the principal cannot unilaterally determine it. The scope is set based on what the parties mutually agreed the fiduciary's responsibility would be. If the director did not take responsibility for the matter then they cannot be required to owe a duty of loyalty. If the director does take responsibility, whether it be unilaterally, voluntarily, or contractually then the duty is owed.

I agree with the premise of Witney's article though, that the broad application of fiduciary duties can make it difficult for non-executives to practically take on multiple roles, which they often do. However, that is not the company's problem. The House of Lords have long shown little sympathy for an individual who puts themselves in a position of conflicting duties. A non-executive does not have to take on multiple roles to fulfil their function to one principal. The Court of Appeal made it clear that the court will only permit self-interest where acting for multiple principals is inherent to the business. If non-execs want to take on conflicting opportunities then get authorisation from the principal. The conservative line is not a problem. Flagrant disregard for the duty is, however.

Now to apply this to non-executives, as my paper briefly did, they do not necessarily take responsibility for all the interests of the company. Executive directors generally do as a presumption because the company simply cannot act without them. Therefore, there is some flexibility in when the duty is owed for non-executives to accommodate their multiple appointments, but that is not the same as advocating a change in the way the duty is applied. The added benefit of this approach compared to the capacity approach is certainty. We can say with certainty what the director's (non-exec or exec's) responsibility was. Saying what capacity they were acting in is riddled with uncertainty.

So finally, to return to Plus Group v Pyke, the director in that case avoided liability because the facts demonstrated he no longer had responsibility for the interests of the company as they had been effectively forced out of the company in all but name. It had nothing to do with capacity. Capacity has never been inherent in common law or equity.

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