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1916 Supreme(SC) 6
Privy Council
Lord Sumner, Lord Parker of Waddington , Viscount Haldane, Justice Lord Buckmaster, JJ.
Cook -Appellant
Versus
G.S. Deeks and others -Resopndent
On appeal from the Supreme Court of Ontario, Appellate Division
Decided On : 23-02-1916
Collyer-Bristow and Co., Redden, Blake , R. McKay, R. Finlay , A.M. Stewart, Nesbitt
Directors cannot divert business opportunities belonging to the company for personal gain. Such a breach of fiduciary duty cannot be ratified by a majority of shareholders if those shareholders are the beneficiaries of the breach, as this would constitute oppression of the minority.
Headnote:(A) Company Law - Directors' Fiduciary Duties - Diversion of Business Opportunity - Directors who assume control of a company's business are not at liberty to sacrifice the interests they are bound to protect, nor can they, while ostensibly acting for the company, divert in their own favour business which should properly belong to the company they represent. Such conduct constitutes a distinct breach of duty, and the benefit of any such contract is held in equity on behalf of the company.
(B) Minority Shareholder Protection - Ratification of Breach - Use of Voting Power - Where directors have acquired property or rights which they must be regarded as holding on behalf of the company, a resolution that the rights of the company should be disregarded cannot be passed by the votes of those interested in securing the property for themselves. Such use of voting power to forfeit the interest and property of the minority in favour of the majority is not sanctioned by law and amounts to the oppression of the minority.
(C) Distinction in Property Rights - Ratification - A distinction exists between cases where a director sells to a company property which was in equity as well as at law their own (which may be validated by subsequent ratification) and cases where a director deals with property which, though theirs at law, in equity belongs to the company. In the latter case, the majority cannot ratify the transaction to the detriment of the minority.
Facts of the case:
Directors of a construction company, while continuing to act as managers and directors, used their position and the company's reputation to negotiate a new contract for their own personal benefit. They intentionally concealed these negotiations from a minority shareholder and co-director to ensure the company had no chance of acquiring the benefit. After securing the contract, they formed a new company to execute the work and realize the profits. Subsequently, utilizing their majority voting power, they passed resolutions in the original company to ratify their actions and declare that the company had no interest in the contract.
Findings of Court:
The directors were guilty of a breach of duty in securing the contract for themselves while entrusted with the conduct of the company's affairs. The contract belonged in equity to the company and should have been treated as a company asset. The resolutions passed by the majority shareholders to release the directors from their claim were invalid as they sought to appropriate company property for the benefit of the majority at the expense of the minority.
Issues: Whether directors could divert a business opportunity to themselves while acting for the company, and whether such a breach of duty could be ratified by a majority of shareholders who were the beneficiaries of the breach.
Ratio Decidendi: Directors owe a fiduciary duty to the company; diverting business opportunities to themselves is a breach of this duty. Where rights are held in equity for the company, the majority shareholders cannot use their voting power to appropriate those rights for themselves, as this would constitute oppression of the minority and a forfeiture of the minority's interest.
Result: Appeal allowed.
Legal Category Hierarchy
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company law
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directors' duties
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fiduciary duties
- diversion of corporate opportunity
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fiduciary duties
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shareholders' rights
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minority protection
- oppression of minority
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minority protection
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directors' duties
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equity
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trusts
- constructive trusts
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trusts
Lord Buckmaster:-
The appellant in this case is the plaintiff in a suit brought against the respondents, under circumstances to which full reference is necessary; his rights depend entirely upon the fact that he is, and has throughout the whole history of these proceedings been, a shareholder in the Toronto Construction Company, Limited, one of the defendants in the suit. Between himself and the defendants G. S. Deeks, G. M. Deeks and T. R. Hinds there have been at sundry times various business arrangements and relationships outside their association in the Toronto Construction Company, Ltd.; but, except for the purpose of explaining what may have caused the conduct to which these proceedings are due, it is unnecessary to refer at length to these relationships.
The respondent, the Toronto Construction Company was formed some time in 1905; the date of its incorporation is nowhere exactly stated, nor is it material. It appears that at the date of its incorporation all the parties were in business in various parts of the Dominion of Canada and the United States of America as contractors. The two defendants — G. S. Deeks and G. M. Deeks — were in partnership, and had just completed for the Canadian Pacific Railway Company a subway under the track of the Canadian Pacific Railway at Winnipeg. In 1905 the Canadian Pacific Railway were asking for tenders for the construction of a line from Bolton to Parry Sound known as the Toronto Sudbury line, and the tenders of G. S. Deeks, made, as it would appear, on behalf of the firm of Deeks and Deeks, were accepted by the company. Before tendering arrangements had been made by Messrs. Deeks with a firm of Winters, Parsons and Boomer that they should take an interest in the contract to the extent of one-half if G. S. Deeks were successful in obtaining it. Mr. Winters, however, had assumed certain obligations which rendered him unwilling to accept his full share of responsibility, and the plaintiff and the defendant Hinds were accordingly introduced by him to Mr. Deeks in order to supplement his obligation, with the result that all the parties agreed to share in the contract in the following proportions : G. S. Deeks and G. M. Deeks to take three-eighths, the plaintiff and the defendant Hinds to take three-eighths, and Winters, Parsons and Boomer one-quarter. In order to place these relationships upon a fixed foundation, and the better to define their interest, the Toronto Construction Company was formed and its share capital distributed in the proportions mentioned, the company taking over and carrying out the work under the contract.
In 1906 Messrs. Winters, Parsons and Boomer withdrew from the company, and the stock that they held was divided equally among the remaining parties, so that the plaintiff and each of the three defendants G. S. Deeks, G. M. Deeks and T. R. Hinds held one-fourth of the entire capital of the company, with the exception of four shares held by Mrs. Deeks (the wife of G. S. Deeks), whose introduction as a shareholder was necessary in order to provide the total number of five. These interests have remained unchanged down to the present time.
The board of directors was comprised of Messrs. Deeks, Hinds, and the plaintiff, and, in addition, G. S. Deeks was appointed president of the company, the plaintiff was general manager, and Hinds was secretary and treasurer, though their Lordships do not think that the description of these offices affords an accurate description of the duties assumed and discharged by the various parties. The company appears to have carried out the work of laying the Toronto Sudbury line to the entire satisfaction of the Canadian Pacific Railway, and they continued to tender and were fortunate in obtaining a considerable number of other contracts of great value from the Canadian Pacific Railway. Apart, however, from this work they undertook no other contracts. As has been already stated, during part of the time of the operations of the company the plai
