Editing Board of directors (section)

===="Conflict of duty and interest"====

As fiduciaries, the directors may not put themselves in a position where their interests and duties conflict with the duties that they owe to the company. The law takes the view that good faith must not only be done, but must be manifestly seen to be done, and zealously patrols the conduct of directors in this regard; and will not allow directors to escape liability by asserting that their decisions were in fact well founded. Traditionally, the law has divided conflicts of duty and interest into three sub-categories:

=====1. Transactions with the company=====

By definition, where a director enters into a transaction with a company, there is a conflict between the director's interest (to enrich themselves with the transaction) and their duty to the company (to ensure that the company gets as much as it can out of the transaction). In some places, this rule is so strictly enforced that, even where the [[conflict of interest]] or conflict of duty is purely hypothetical, the directors can be forced to disgorge all personal gains arising from it. In ''Aberdeen Ry v Blaikie'' (1854) 1 Macq HL 461 [[Robert Rolfe, 1st Baron Cranworth|Lord Cranworth]] stated in his judgment that:

:"A corporate body can only act by agents, and it is, of course, the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, ''or can have'', a personal interest conflicting ''or which possibly may conflict'', with the interests of those whom he is bound to protect... So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of the contract entered into..." (''emphasis'' added)

However, in many jurisdictions the members of the company are permitted to ratify transactions which would otherwise fall foul of this principle. It is also largely accepted in most jurisdictions that this principle can be overridden in the company's constitution.

In many countries, there is also a statutory duty to declare interests in relation to any transactions, and the director can be fined for failing to make disclosure.{{efn|In the United Kingdom, see section 317 of the Companies Act 1985.}}

=====2. Use of corporate property, opportunity, or information =====
Directors must not, without the informed consent of the company, use for their own profit the company's assets, [[corporate opportunity|opportunities]], or information. This prohibition is much less flexible than the prohibition against the transactions with the company, and attempts to circumvent it using provisions in the articles have met with limited success.

In ''[[Regal (Hastings) v Gulliver|Regal (Hastings) Ltd v Gulliver]]'' [1942] All ER 378 the House of Lords, in upholding what was regarded as a wholly unmeritorious claim by the shareholders,{{efn|In summary, the facts were as follows: Company A owned a cinema, and the directors decided to acquire two other cinemas with a view to selling the entire undertaking as a [[going concern]]. They formed a new company ("Company B") to take the leases of the two new cinemas. But the lessor insisted on various stipulations, one of which was that Company B had to have a paid up [[share capital]] of not less than £5,000 (a substantial sum at the time). Company A was unable to subscribe for more than £2,000 in shares, so the directors arranged for the remaining 3,000 shares to be taken by themselves and their friends. Later, instead of selling the undertaking, they sold all of the shares in both companies and made a substantial profit. The shareholders of Company A sued asking that directors and their friends to disgorge the profits that they had made in connection with their 3,000 shares in Company B – the very same shares which the shareholders in Company A had been asked to subscribe (through Company A) but refused to do so.}} held that:

: "(i) that what the directors did was so related to the affairs of the company that it can properly be said to have been done in the course of their management and in the utilisation of their opportunities and special knowledge as directors; and (ii) that what they did resulted in profit to themselves."

And accordingly, the directors were required to disgorge the profits that they made, and the shareholders received their windfall.

The decision has been followed in several subsequent cases,<ref>''Industrial Development Consultants v Cooley'' [1972] 1 WLR 443 (corporate information), ''[[Canadian Aero Service v. O'Malley]]'' (1973) 40 DLR (3d) 371 (corporate opportunity) and ''Boardman v Phipps'' [1967] 2 AC 46 (corporate opportunity, which again, the company itself had declined to take up)</ref> and is now regarded as settled law.

=====3. Competing with the company =====
Directors cannot compete directly with the company without a conflict of interest arising. Similarly, they should not act as directors of competing companies, as their duties to each company would then conflict with each other.