Director Disputes: What if a company director starts a competing business in Guernsey?
7 Min Read
Learning that a company director has set up, joined or assisted a competing business can raise serious and immediate concerns.
A serving director may know the company’s pricing, margins, customers, suppliers, employees and commercial plans. If that information or influence is used to advance a rival business, the consequences for the company can be substantial.
However, the fact that a director has an interest in another business does not, by itself, prove wrongdoing. The assessment instead turns on the director’s conduct, the information given to the board, the scope of any authority granted and the terms of the company’s governing and contractual documents.
Why can a competing business place a director in breach of duty?
Although the Companies (Guernsey) Law, 2008 (the Companies Law) does not expressly impose fiduciary duties on Guernsey directors, Guernsey customary law and the Guernsey application of English common law require directors to observe duties of honesty and loyalty. These are distinct from the duty to act with skill and care, which is competency-based.
In practical terms, a director’s honest assessment of the company’s interests must drive their decisions and personal interests must not be allowed to take priority. A director must also exercise independent judgement and use their powers for proper purposes.
An outside commercial interest is not necessarily prohibited. The concern is more likely to arise where the director’s loyalty is divided, the other venture is concealed or the director uses their position to give the competing business an advantage.
What conduct should the company investigate?
The relevant question is not simply whether the two businesses compete. The company should examine the director’s conduct and any resulting risk or loss. This could include whether the director has:
- transferred or relied upon confidential customer, supplier, pricing or operational information
- steered clients, contracts, tenders or other commercial opportunities towards the competing business
- approached colleagues about leaving the company or joining the new venture
- used company funds, systems, equipment, premises or working time for the competitor
- kept their involvement from the board where disclosure was required
- taken part in company decisions or transactions that benefited the competitor without declaring their interest
The timing can also be important. Preparatory work undertaken while the person was still a director may be relevant even if the competing business did not begin trading until after their resignation.
Was the director’s interest disclosed?
Disclosure and authorisation can be central to the dispute.
The Companies Law expressly requires a director who becomes aware that they are interested in a transaction or proposed transaction with the company to disclose the nature and extent of that interest to the board. Depending on the dealings between the businesses, this may apply to a director’s connection with a competitor.
A transaction involving an interested director may, in certain circumstances, be voidable by the company where the required disclosure was not made. The outcome will depend on the particular transaction, the information provided to the board and whether an applicable exception, approval or ratification applies.
Board minutes, declarations of interest, correspondence and records of any approval should therefore be reviewed closely. A general awareness that the director had other business interests may not answer the more specific question of what was disclosed and authorised.
Check the Guernsey company’s documents and each role held by the director
The company’s memorandum and articles of incorporation, any shareholders’ agreement and the director’s service or employment agreement may all affect the position. These documents can contain terms dealing with conflicts, outside appointments, confidentiality, intellectual property, non-solicitation and competition.
Where the company is a licensed fiduciary business, additional restrictions and regulatory standards apply.
It is also important to separate the person’s different legal capacities. A director may simultaneously be a shareholder, employee or consultant. Removing or restricting them in one capacity will not necessarily determine their rights in another. The available options should be assessed across all of the relevant documents rather than by looking at the directorship in isolation.
Does resignation bring the director’s obligations to an end?
Resignation does not erase conduct that occurred while the director was in office. Nor does it necessarily release a former director from every continuing restriction.
Obligations relating to confidential information, company property and certain opportunities obtained through the directorship may remain relevant after departure. Contractual restrictions on competing, soliciting customers or recruiting employees may also continue for a stated period.
That does not mean every post-termination restriction will be enforceable exactly as written. Its effect will depend on its wording, purpose and the circumstances in which enforcement is sought.
What should the company do first?
A rapid response may be needed, but decisions should be based on evidence rather than assumption. Useful early steps may include:
- identifying the competing business, the director’s role in it and when their involvement began
- preserving relevant company records, communications and access logs lawfully
- establishing whether customers, staff, information, assets or business opportunities have been diverted
- reviewing board minutes, conflict declarations, company policies and contractual restrictions
- assessing whether immediate protective action is required to prevent further harm
The company should also determine who can make decisions on its behalf where one member of the board is potentially conflicted. A clear and properly documented process can be important if the dispute later reaches court or comes under regulatory scrutiny.
How might the dispute be resolved in Guernsey?
The appropriate response will depend on the seriousness and urgency of the conduct, the evidence available and the working relationship between the directors and shareholders.
Some disputes can be resolved through direct negotiation or mediation. An agreement might require the director to cease particular activity, stop using specified information, return company property, change their responsibilities or leave the business on agreed terms.
Where the company faces continuing or imminent harm, court proceedings may be considered. Depending on the facts, the company may seek orders intended to restrain further conduct, restore property, reverse an affected transaction, compensate loss or require the director to account for profits obtained through a breach of duty.
Are there regulatory or data protection consequences in Guernsey?
The position can be more serious for one of the 150 or so licensed fiduciary businesses regulated by the Guernsey Financial Services Commission (GFSC), including trust companies and corporate services providers. The nature of the company’s regulated activities may affect the potential sanctions and the steps expected of it once a conflict or breach is discovered.
Possible reporting obligations should be considered alongside the company’s civil remedies. Depending on the business and the events involved, notification to the GFSC may be required. If information taken or disclosed includes personal data relating to officers, employees, clients or contractors, the company should also consider whether the incident must be reported to the Office of the Data Protection Authority.
Avoid creating a second dispute
Actions intended to protect the company can themselves have legal and commercial consequences. Suspending access to systems, excluding a director from management, dismissing them as an employee or attempting to remove them from office may engage different procedures and rights.
Public accusations can also harm the company’s reputation, alert customers or employees unnecessarily and make a commercial resolution harder to achieve. Early advice can help the company protect evidence and assets while choosing a proportionate response.
Speak with a specialist Guernsey commercial disputes Advocate
A director’s involvement in a competing business can put valuable relationships, confidential information and commercial opportunities at risk.
Babbé LLP acts for companies, directors and shareholders in complex commercial disputes involving directors’ duties, competing interests and disagreements over the ownership or management of a business.
Contact Us if you believe a director has established, joined or assisted a competing business. An experienced commercial disputes Advocate can consider the circumstances and explain the options available. Alternatively, visit Commercial Disputes to learn more about our services.