In the absence of express clauses in a contract of employment or service agreement, it can be very difficult to prevent an employee from leaving and competing with their former employer. With directors, the effect of a departure coupled with the establishment of a competing business may be seriously damaging. While ensuring the director has a robust service agreement with garden leave provisions and enforceable post-termination restrictions is the most effective deterrent, the fiduciary relationship between a director and a company may also provide a remedy.

What is a fiduciary relationship?

Because of the unique relationship between a company and its directors, a director is precluded from obtaining for himself, either secretly or without the informed approval of the company, any business advantage either belonging to the company or for which he has been negotiating. This is known as a fiduciary duty and is analogous to the duty between the trustee of a private trust and a beneficiary. Like a trustee, if the director does obtain such an advantage he may be forced to account to his former employer for all the profits made from that advantage.

A director is free to resign as director and the fiduciary relationship ceases at the time of the resignation. In principle, once he has resigned his directorship, the director is free to set up in competition with his former employer and is not precluded (subject to any provisions in a service agreement or contract) from using, in the new business, the general fund of skill and knowledge he acquired as a director in the old one. However, a director may still be in breach of his fiduciary duty where the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself any “maturing business opportunity” sought by his former employer and where it was his position as director that led to the opportunity being acquired.

What conduct amounts to a breach of fiduciary duty?

In considering whether an act of a director amounts to the acquisition of a “maturing business opportunity” the court will take into account the position or office held, the nature of the opportunity, its ripeness, its specifics and the director’s relation to it, the amount of knowledge possessed, the circumstances in which it was obtained, the timing between resignation and acquiring the opportunity and the circumstances of the resignation.

In Foster Bryant Surveying Ltd v Bryant, the Court of Appeal reviewed all the authorities and identified three different situations. At either end of the spectrum, where the former director’s conduct was either obviously without fault (as was the case with Mr Bryant who had been frozen out of the company, forced to resign and had not solicited the subsequent approach from a client) or obviously in bad faith (where the director had plotted from the outset to divert the opportunity, resigned without notice and immediately set up in competition with staff and clients poached from his previous employer) it is easy to make a decision. However, the vast majority of cases fall into the middle ground.

In Bryant the Court of Appeal approved pragmatic solutions based on a common sense and merits-based approach. This may be a classic case, however, of something that it is easy for a court to say but far more difficult to actually do.

From the authorities, there is a whole range of activity that may or may not amount to a breach of fiduciary duty depending on the facts of each case. In particular, the court will focus on the activity while still a director, what preparatory steps were taken, when they were taken and whether there is a link between the resignation and departure of the director and the acquisition of the business opportunity.

A service agreement is always the best!

In considering the options when faced with a competing former director, evidence of breach of fiduciary duty may secure a remedy that would not otherwise be available. However, the best protection against a former director remains a well-drafted service agreement, with a garden leave clause and enforceable restrictions preventing the solicitation of customers and staff post-termination.