Directors duties and Pyrrhic victories – what are the ingredients for a successful claim?

The defection of directors to a competing company is often a matter of concern for their former employer.  There may be a natural suspicion that the directors will seek to unfairly exploit the information they gained in their previous role.  However, rushing off to Court is not always be the best solution.  As any law school student will know, a successful Claimant must show that a duty exists, the duty has been breached and that loss has been suffered as a result.

The Claimants in the recent case of Gamatronic -v- Hamilton & Mansfield ticked the first two of these boxes but fell down on the third.

The Defendants were directors and shareholders of Gamatronic.  They left to join a competitor (Vox) and entered into a share purchase agreement (SPA) to sell their shares to Gamatronic’s parent.  Gamatronic subsequently issued proceedings, alleging that the Defendants had breached their duties by helping set up Vox whilst they were still at Gamatronic.  It asked the court to rescind the SPA and order that the Defendants repay their Gamatronic salaries and account to Gamatronic for their Vox salaries.

The Court agreed that the Defendants owed various duties in their capacities as directors, employees and shareholders.  Gamatronic also established that these duties had been breached by the Defendants travelling to Denver to meet Vox’s founders and helping set up Vox’s price list.

However, the claim then ran into trouble.  Although the Defendants had breached their duties, they spent comparatively little time carrying out the competing activities.  The evidence showed that they had otherwise diligently discharged their duties to Gamatronic.  As a result, it would not be fair to order them to repay their Gamatronic salaries.

The Court also rejected the claim to account for the Defendants’ Vox salaries.  The Defendants didn’t actually receive a Vox salary until nine months after they left Gamatronic, so there was no link to the breach of duty.

The Court agreed that this was a case in which rescission would be available due to the Defendants’ failure to disclose in the SPA their breaches of duty.  However, there was again a catch.  Rescission of the SPA would usually mean Gamatronic refunding the sale price and returning the shares to the Defendants.  However, Gamatronic had already stated that it did not want this to happen.  The Court held that there was no reason to depart from the normal position.  If Gamatronic did not want a rescission on the usual basis it could not have it at all.

This case is a good example of the importance of strategic planning at the outset of any claim.  It is easy to be distracted by what departing directors have done and forget to consider what has actually happened as a result.  All matters must be taken into account to best protect the remaining business.

For further information or support with Directors’ Duties, please feel free to contact our team.