VIEWPOINT |
Laying down the law
21
Martin Fleetwood
Obtaining competition protection from departing senior management In an industry where there are many opportunities for developing a business, such as the rail sector, there is a strong market for talent and expertise
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here a business has invested in developing and supporting that talent, particularly in senior roles, it is important for that business to be able to protect the intellectual property which the business owns and which supports the work done by its management. Legal controls are therefore necessary to help manage this position. Directors or de facto directors of a company often have access to some of the most confidential information and trade secrets of a business and have strong relationships with a company’s customers, suppliers and employees. If a director resigns and unlawfully sets up in competition, or takes a position with a competitor, this could pose a major threat to the business. The recent High Court case of Burnell v Trans-Tag Ltd and Robert Aird (TransTag) has clarified the potential liability of directors and other senior staff as well as provided some helpful guidance to companies seeking to protect their business from such unlawful conduct. When is a member of senior staff considered a de facto director? A key point in the Trans-Tag case was the clarification that in certain cases a senior manager who was not actually a director
could be treated in law as if they were a director and be subject to the various legal duties that are imposed on company directors. Even though a senior individual has not been formally appointed as a director, the judge in Trans-Tag confirmed that due to their actions they can be considered to be a de facto director. This means that they can be liable for a breach of duty in the same way as a director can be. The principles of how to determine whether a person is a de facto director were established in the 2014 case Smithton Limited v Naggar and include looking at: • Whether they assumed the status and function of a director so as to make themselves responsible as if they were a director. • What role they took and whether their acts were directorial in nature with reference to the company’s corporate governance system. • Whether the company considered them to be a director and held them out as such. • Whether third parties considered them to be a director. Assuming these principles are established, directors’ duties will apply.
Directors’ duties following resignation or termination of directorship Both directors and de facto directors owe a number of duties to a company pursuant to the Companies Act 2006 (CA 2006). These include duties to: • Promote the success of the company (s.172 CA 2006). • Exercise reasonable care skill and diligence (s.174 CA 2006). • Avoid conflicts of interest (s.175 CA 2006). The general rule is that a director ceases to be subject to these general duties when they cease to be a director of the company. An exception to this is set out in s170(2) CA 2006, which confirms that a person who ceases to be a director continues to be subject to the duty to avoid conflicts of interests. Using information obtained at one company for the benefit of another company is likely to fall into this category. Previously, it was considered that a breach of duty under s170(2) CA 2006 needed to be based on actions of the director before or at the time of resignation. However, following Trans-Tag this is no longer the case. The court held that s170(2) (a) CA 2006 is a continuing duty and that it must therefore be possible for a breach of
