A transcript has just been released of a company law case decided last year: Thermascan Limited v Norman.
It's the first reported case in England and Wales relating to those provisions of the Companies Act 2006 that govern conflicts of interest and the appropriation by directors of their company's business opportunities.
What follows is a brief summary of the facts in Thermascan Limited v Norman  EWHC 3694 (Ch) and an analysis of the case.
Mr Norman, a thermal engineer by trade, had been an executive director of Thermascan Limited (Thermascan) since 1997. Thermascan conducted specialised surveys of commercial property, typically for insurance purposes. It used infrared technology to scan factories and warehouses for problem signs such as a hot spot indicating an electrical fault and possible fire risk. A fresh survey would be required at the same time each year prior to renewal of the customer's insurance policy.
On 10 September 2008 Mr Norman gave one month's notice to Thermascan to terminate his contract of employment. On expiry of the notice - as it happens, nine days after the conflict of interest provisions of the Companies Act 2006 (CA 2006) came into force - he resigned as a director. Within a month he commenced employment with Sykes & Co, a building and property maintenance company. His job was to head up a new preventative maintenance division providing thermal engineering survey services. Four months after that Mr Norman was made redundant. He set about launching his own business through a company called Hotspot-Thermography Limited.
It is axiomatic that an executive director who, having left his company, joins or sets up a competing business is, legally speaking, in a dangerous place. There is a real prospect of personal liability for breach of contract and/or fiduciary duty. The former director may even be ordered to account to the company for all the profits of the new venture.
It is best to consider Mr Norman's two distinct roles in turn, first as employee and then as company director.
Mr Norman was bound by the terms of his employment contract:
- Not, at any time, to use or to divulge any confidential information concerning Thermascan's business which had come to his knowledge in the course of his employment and which was not in the public domain.
- Not, for six months after termination, to canvass or solicit business from any person with whom he had dealt to a material extent and who at any time in the twelve months preceding termination had been a Thermascan customer.
Clearly therefore, while at Sykes & Co, Mr Norman could neither exploit confidential information nor canvass or solicit Thermascan's customers. However, by the time he was made redundant, he was virtually free of the second of these obligations. He continued to be bound by the restriction as regards the use of confidential information.
Perhaps counter-intuitively Mr Norman's fiduciary duties as a director did not entirely come to an end when he resigned. As regards the exploitation of any property, information or opportunity of which he became aware when he was in office, he remained subject to a statutory duty to avoid a conflict between his duties to Thermascan and his self-interest (CA 2006, s 175(1) and s 170(2)(a)).
Thermascan sought a court order restraining Mr Norman from canvassing or soliciting its customers, even if no confidential information was involved. It invoked CA 2006, and specifically sections 170 and 175.
The case helps us answer the following questions:
- Does CA 2006 change the way in which we advise company directors who, having left their companies, propose to join or set up competing businesses? Specifically, does it produce a different answer than the common law it replaced?
No. The parties in Thermascan agreed, and the trial judge recorded, that the relevant provisions of CA 2006 did not alter the pre-existing law.
(One change indisputably brought about by CA 2006 is that certain conflicts of interest on the part of company directors may now be authorised not merely by shareholders but in some cases by the disinterested directors. This was not a consideration in the Thermascan case.)
- How do the courts balance the interests of the company in such a case with the public interest in permitting former directors to continue to earn a living using their pre-existing fund of skill and knowledge?
As explained above, Mr Norman, even after resigning as a director, was precluded - without the informed approval of Thermascan - from exploiting property, information or opportunities of which he became aware when he was a director. This would extend to the exploitation of any business advantage either belonging to Thermascan or for which it had been negotiating. On the other hand, the courts recognise that, no less than employees, directors acquire a general fund of knowledge, skill and experience in the course of their work. It is plainly in the public interest that they should be free to exploit this fund of knowledge in a new position.
The effect of the court's judgment in Thermascan was that the "stock in trade" of knowledge which Mr Norman had acquired as a director of Thermascan, even including such things as business contacts and personal connections made as a result of his directorship, was his to exploit in the future. However:
- It would have been different if Mr Norman had been subject to ongoing contractual restrictions. Here however the six-month non-solicitation covenant to which he had been subject lapsed shortly after he was made redundant from Sykes & Co.
- While the restriction on using confidential information had not expired, there appeared to be inadequate evidence in Mr Norman's case to support a conclusion that, by contacting Thermascan's customers after the six-month period, he was in breach of it.
- The analysis would have been different if "trade secrets" had been at issue - the classic examples are chemical formulae and algorithms, but commercial information can fall into this category too.
- It would also have been different if Mr Norman's resignation had been prompted or influenced by a wish to acquire "maturing business opportunities" sought by Thermascan and where it was his position with the company rather than a fresh initiative that led him to the opportunity which he later acquired.
For a business opportunity to be said to be "maturing" it appears that there must generally have been some discussion, if not significant discussion, of the potential opportunity. That would not typically have been the case at Thermascan where the lion's share of the trade was repeat business and there was minimal contact between Thermascan and individual customers until shortly before the next occurring survey date. The judge dismissed an argument to the effect that the annually recurring surveys were in the nature of periodically maturing business opportunities. He came to the conclusion that, while Mr Norman remained subject to (limited) fiduciary duties even after resignation as a director, they did not amount to a blanket prohibition on canvassing or soliciting business from Thermascan customers.
Each case turns on its own facts and the nature of Thermascan's business was particularly influential here. It would have been a relevant factor if there had been a greater level of formality in the arrangements between Thermascan and its customers under which Thermascan could definitely look forward to recurring business.
It is perhaps worth pointing out that Thermascan is to be distinguished from a long line of other cases which turn on what a director should or should not do while still in office. There was no suggestion in this case that the former director actually sought to compete with the company prior to termination. Still less was there that other classic feature of these sorts of case: a conspiracy to damage or even destroy the old business before moving on to the new.