29 January 2019
Directors often trade in shares in the companies that have appointed them, or carry out business activities in related fields. Many directors are familiar with the restrictions on share trading by key management personnel of ASX listed companies (as discussed in Andrew Lumsden's article on this subject).
However, in a recent decision, the Federal Court (Court) has provided an important reminder that directors of any company—listed or not—are prohibited from taking up opportunities which should properly have been made available to their companies.
The Court’s decision continues the gradual tightening of restrictions on directors taking up external opportunities.
CellOS Software Limited (Company), an Australian unlisted public company, brought proceedings in the Federal Court against its former CEO and director, Mr Jason Huber (Huber).
Huber had been responsible for conducting capital raising to fund the Company’s operations. Instead, however, he secretly bought 48 million of the Company’s shares from early investors at a fraction of the prevailing market price. Huber then sold those shares to new investors for vastly higher prices. He obscured his conduct by holding the shares though a complex web of 47 offshore companies registered in opaque jurisdictions and by concealing his interest in these companies. The profits were used to loan funds back to the Company and for a range of personal matters such as discharging Huber’s prior bankruptcy, Huber’s personal expenses and the purchase of properties in Melbourne and Dubai.
The Court found that:
Accordingly, the Court found that Huber breached his statutory and fiduciary duties to the Company, including:
Putting aside insider trading issues, a director’s share trading typically has nothing to do with their statutory or fiduciary duties because there is generally no diversion of any business opportunity for the company by such activity. A company is usually not in the business of buying and selling shares in itself.
However, where a director owes a particular fiduciary duty because of the scope and responsibilities of their role (here, Huber’s role in fundraising activities for the Company) their duty is to facilitate that objective rather than to undermine it. In these circumstances, a director will breach their duties if they divert an opportunity from the company to themselves or their associates.
Having regard to previous decisions, the Court considered the following principles to explain which opportunities a director is prohibited from pursuing:
Previously, Courts had only restricted directors from pursuing opportunities which derived solely from their role.
However, in recent decisions, these restrictions have expanded to include any opportunity obtained because of or using knowledge resulting from the director’s role. This decision continues that new approach and applies it for the first time to a director’s share trading in the Company itself.
Directors should carefully consider whether a proposed personal activity or opportunity:
The starker the contrast between the personal interest of a director and their duty to the company, the more likely a court will find pursuing it to be a breach of the director’s duties.
If a director breaches their duties in this way, they will generally be required to account to the company for any profits made, as well as facing serious penalties.
Disclosure: Corrs acted for CellOS in the proceeding.
 CellOS Software Ltd v Huber  FCA 2069.
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