Following a recent case in which a director was found to be in breach of his obligations to his company for accepting the loan of a digger comes another in which the actions of a director have been challenged – but with a different result.
The case involved popular Dragon’s Den judge Theo Paphitis, who was a director of the Ryman Group when it was offered another business that was in the same line of business as one of the Ryman Group companies. The board of Ryman declined to buy the business, and Mr Paphitis went ahead and acquired it using a company set up for the purpose. Ryman provided much of the funding and other assistance – on an arm’s-length basis – for the new company.
The company was later sold for a massive profit. The issue brought before the court was that the original board meeting at which Ryman declined to purchase the business was invalid because the appropriate notices had not been given. A later, validly called, board meeting approved the arrangement regarding Mr Paphitis’s acquisition of the company.
One of the shareholders considered that Mr Paphitis had diverted a valuable acquisition away from Ryman and sought the leave of the court to sue on behalf of the shareholders.
The court refused. Mr Justice Newey said, “In the present case, there is a strong case for saying that the ‘no conflict’ and ‘no profit’ rules were both potentially engaged.” However, “the chances of the claims succeeding are significantly less than evens.”
There was nothing to suggest that the decision of the board had been anything other than entirely open and Ryman’s decision not to acquire the other company itself was properly made. In particular, advice was taken by Ryman concerning the potential acquisition and the company’s independent review procedures had been engaged, leading to the conclusion that the acquisition was not one the company should make.
Where directors get involved in ‘outside’ business deals, it is important to ensure that a breach of fiduciary duty does not occur. It is essential to be open in one’s disclosures to the board and to retain evidence that such actions are known about and approved.
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Partner Note
Kleanthous v Paphitis & Ors [2011] EWHC 2287 (Ch).