High Court limits the corporate opportunity doctrine to a director who profits

Can a director divert an opportunity that their company may have been interested in pursuing? The usual answer is no. But what if the director doesn’t benefit? In a surprising decision, Rascals International Ltd v Taylor, the NZ High Court has ruled that if the director doesn’t benefit, the corporate opportunity doctrine doesn’t prevent them helping a third party.

Grant Taylor was a director of Rascals, a nappy company. Rascals was interested in buying a competing brand, Treasures. Shortly before a scheduled meeting with Treasures’ owner, Mr Taylor agreed to exit Rascals. He then met with the owner and offered to buy Treasures himself.

Mr Taylor ultimately agreed to a restraint of trade, which prevented him from buying Treasures. He pulled out of discussions with Treasures.

But he encouraged a friend, Mr Armitage, to buy Treasures. Mr Armitage and two partners bought it through their company, JJK. Mr Taylor met them to discuss the proposed purchase, joined them on a site visit to a Treasures factory, introduced them to Rascals’ agent in China, and provided a Rascals pitch deck and pricing formulas. Some of this happened while he was still a director of Rascals. On the evidence, he got nothing in return.

Mr Taylor admitted he had breached his duties and settled on the eve of trial. But could Rascals bring a claim against JJK? Rascals needed to show: (1) that Mr Taylor had breached a duty, and (2) that JJK had accessory liability for Mr Taylor’s breach.

The judge found that Mr Taylor had breached his fiduciary duty of loyalty to Rascals for the period while he remained a director “by a fine margin”. But this required proof of loss, and she found that Rascals would not have purchased Treasures. By contrast, the corporate opportunity doctrine continues after the director leaves office. It also gives a gain-based remedy – stripping away a defendant’s gain – and a proprietary remedy that can trace and recover the gain from a third party.

But the judge ruled that the doctrine only applies where the director has profited from the opportunity. Because Mr Taylor made no profit from helping JJK, he was not in breach, and JJK therefore had no accessory liability.

Does a lack of profit really mean no breach? As the judge accepted, the doctrine “can be engaged in the absence of dishonesty, actual disloyalty or conflict, or damage to the company”. While none of that is a barrier, the Court found that a director’s failure to charge a third party for their services is. I’m not sure that’s the right place to draw the line. The decision also collapses the two underlying rationales for the doctrine – the no-conflict rule and the no-profit rule – into a single no-profit rule.

It may be that, on the judge’s findings, accessory liability would have failed in any event. But I’m not sure that it should have failed on such a narrow reading of the corporate opportunity doctrine.