High Court widens what counts as a corporate opportunity

A director must not take a corporate opportunity for their personal benefit. But what is a corporate opportunity? And does it make a difference if the company is a single purpose SPV? A new decision from the New Zealand High Court addresses these issues.

Anthony Beverley, William Leckie and Christopher Morrison set up a carbon fund to buy forests that had government carbon credits. Companies who emitted carbon could invest in the fund and acquire credits. The three of them set up a limited partnership, manager and holding company, and they were each directors of the companies.

The directors had a falling out, and Mr Leckie and Mr Morrison then created a new fund without Mr Beverley. Mr Beverley sued Mr Leckie and Mr Morrison, alleging that they had wrongly diverted a corporate opportunity to create a new fund.

Was a new fund a corporate opportunity of the original fund? Justice Radich ruled that there is no requirement that the opportunity “belonged” to the original fund, or that the original fund was “actively pursuing” the opportunity.

Instead, it is enough if the opportunity is “sufficiently connected” to the director’s role. There is a sufficient connection if the director accesses or pursues an opportunity by using their position as a director. But even if they don’t use their position in this way, there may still be a sufficient connection if the director pursues an opportunity that falls within the scope of the company’s business. As the judge observed, the rule is “intentionally draconian”.

Justice Radich concluded that Mr Leckie and Mr Morrison used their position as directors of the original fund to set up the second. It had an identical corporate structure, and they used their positions as directors of the original fund to transfer staff, approach existing investors, and market the new fund by leveraging the success of the original fund.

Mr Leckie and Mr Morrison argued that the companies associated with the original fund were SPVs, and only intended to be used for a single fund. Justice Radich accepted that a director has no liability if they can show there was an agreement that a company would not pursue future opportunities, such as by using a single-purpose SPV. But while the judge accepted that the original general partner and manager were single-purpose SPVs, the holding company was not. It was therefore a breach of duty for Mr Leckie and Mr Morrison as directors of that company to pursue a second fund.

Mr Leckie and Mr Morrison were required to account to the holding company for all of the profits they made on the second fund, less a 15% allowance for their work in establishing the second fund.

The decision is a salutary reminder of the extensive duties that directors owe, with the Court acknowledging that it was applying a “draconian” approach to ensure that directors do not take corporate opportunities for their own use.