When does planning your next venture become a breach of fiduciary duty?

Background

The former directors both held senior roles at Cheshire Estate & Legal Limited (“CEL”). They both resigned in early 2023 and were immediately placed on gardening leave. CEL alleged that, before their resignation, the two directors had taken steps to set up a new business which would directly compete with CEL including:

• registering the name of the new business in August 2022;
• developing a website;
• setting up a bank account;
• applying to the Solicitors Regulation Authority for registration (so as to enable the new business to operate); and
• approaching funding partners who had previously worked with CEL.

Within a month of the resignations, CEL initiated court proceedings against the two former directors alleging breach of contract, conspiracy, and breach of fiduciary duties. CEL claimed the above actions went beyond acceptable preparatory steps and caused harm to it.

Following a trial in April 2023, the High Court ruled against CEL and found that the former directors had not breached their fiduciary duties.

The appeal

CEL’s appeal sought to challenge the High Court’s decisions and the Court of Appeal (“CoA”) handed down its judgment on 5 November 2024.

The CoA agreed with the High Court and described CEL’s appeal as ‘ill-founded’. It also said that the preparatory steps outlined above did not “cross the line” into a conflict of interest and/or demonstrate an intention to harm CEL. The CoA also indicated that the former directors had acted faithfully during their tenure at CEL and had not diverted any of CEL’s resources, business, or contacts to their new venture before resigning.  The CoA agreed that the former directors had acted in accordance with the fiduciary duties they owed to CEL.

Implications

The CoA’s decision highlights key issues for directors, employees, and employers around fiduciary duties and post-employment restrictions. While directors owe a duty to act in the best interest of the company, the ruling clarifies that certain preparatory steps taken to set up future endeavours, will not necessarily amount to a breach of this duty.

The judgment also underscores the importance of robust evidence when pursuing claims against directors for alleged breach of their fiduciary duties.

Key Takeaways

• Fiduciary duty limits: Directors may make certain future plans, provided they continue to act in the best interest of their current company and avoid conflicts of interest, without being deemed to be in breach of their fiduciary duties.
• Evidence standards: Strong evidence is critical for claims involving conspiracy or breach of fiduciary duties.
• Impact on restrictive covenants: As a result of this ruling businesses may wish to review their employment and confidentiality agreements to ensure that they provide the best possible protection in situations where departing directors seek to set up new business ventures.

Our Corporate & Commercial, Disputes and Employment teams have significant combined experience when it comes to advising on fiduciary duties, protecting employer’s interests and dealing with litigation involving alleged breaches of director’s fiduciary duties. If you need advice in relation to director’s fiduciary duties, please get in touch with Adele Whaley.