The Director's Fiduciary Duty not to Compete

AuthorMichael Christie
Publication Date01 Jul 1992
DOIhttp://doi.org/10.1111/j.1468-2230.1992.tb00928.x
The
Director's Fiduciary Duty not to Compete
Michael Christie
*
I
Introduction
Following the centenary of
London and Mashonaland Exploration
Co
v
New
Mashonaland Exploration
Co,'
it
is the submission of this article that the case was
wrongly decided, that
it
is even less tenable today and that
it
continues to exert
a damaging influence on corporate fiduciary law. The case stands for this principle:
it
is permissible for a director of one company to act as director of a competing
company. Because a director is permitted to do for himself that which he can do
for a rival company, the principle has been extended, so as to allow a director
personally to compete
with
the company.*
It
will
be argued
in
this article that despite
London and Mashonaland Exploration
and judicial opinion supporting
it,
the law does indeed impose a fiduciary duty on
a director not to compete
with
his company or to serve as a director
of
a competing
company. This duty has its origins
in
a fundamental principle
of
Equity. The duty
is not absolute, nor even harsh, for Equity will only condemn competition where
there has not been consent obtained by the director after
full
disclosure. But even
with
this qualification, the rule has yet to receive wholehearted judicial support.
Louis Brandeis, who was to become a Justice
of
the United States Supreme Court,
once wrote:
The practice of interlocking directorates
is
the root of many evils.
It
offends laws human
and divine. Applied
to
rival corporations,
it
tends
to
the suppression of competition
.
.
.
Applied
to
corporations which deal with each other,
it
tends
to
disloyalty and
to
violation of the
fundamental law that no man can serve two masters. In either event,
it
tends
to
inefficiency;
for
it
removes incentive and destroys soundness of judgment.'
It
can readily be seen that serving on the boards
of
two competing companies
raises two distinct policy issues. The first one relates to anti-trust law, which is
premised on the belief that competition is economically and socially desirable. Thus,
anti-trust policy makers focus, in varying degrees, on the extent to which interlocking
directorates impede c~mpetition,~ and attempt to prevent anti-competitive conduct
arising from interlocking directorates.s
The second issue of policy raised by Brandeis concerns the conflict of interest
problems. But any problems associated
with
interlocking directorates have been
seen primarily through the eyes of anti-trust lawyers.6 Indeed, even Brandeis
*B.Ec. LL.M (Syd), B.C.L. (Oxon); of the New South Wales Bar.
The author is very grateful
to
Professor Paul Finn of the Australian National University for his helpful
comments on an earlier draft of
this
article. Of course, all errors and omissions are those of the author.
I
I18911
WN
165.
2
Bell
v
Lever Bros
I
19321
AC
161
at
195,
per Lord Blanesburgh.
3
'Breaking the Money Trusts,'
Hurper's Weekly,
6
December
1913,
p
13,
quoted
in
L. Seplaki.
Anrirrusr
und
the
Economics ofrhe Murker
(New York: Harcourt,
1982)
p
594.
4
See P. Areeda and D.R. Turner.
Anri-Trust
Law
(Boston: Little Brown,
1980)
Vol V, pp
359-376.
5
In some countries, eg the United States, legislation specifically proscribes anti-competitive interlocking
6
Harold Marsh, 'Are Directors Trustees? Conflict of Interest and Corporate Morality'
(1%)
7he Business
directorates (Clayton Act,
s
8).
Others rely on more general provisions.
buyer
35,
at
72.
506
.The
Modern
Law
Retien.
55:4
July
1992 0026-7961

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