Knowledge is power. In an English company, the board’s authority is derived from shareholders, delegated through the articles of association. But within the boardroom, the management of information is of crucial importance, whether that information relates, for example, to the company’s business or the other interests of its directors outside the boardroom. What obligations and rights do directors have in relation to corporate information? Are they obliged, or even permitted, to pass information to shareholders whether generally or to their appointing shareholders whom they represent?

In this article, we consider recent English cases arising out of misuse of corporate information and the obligation on directors to disclose information to their companies. Finally, we touch upon the application of privilege to legal advice provided to the company in the context of a shareholder dispute.

Directors’ duty of confidence

A director owes a duty to maintain the confidentiality of the business and information of their company.

In closely-held companies, directors are often shareholders or appointed by corporate shareholders and might also be employed by the appointing shareholder (or its group). Shareholders hope for their appointed directors to act as their eyes and ears within the company. That places the directors in a difficult position. The directors are not permitted to disclose confidential information of the company to their appointing shareholder, though will no doubt come under pressure to do so.

This problem is exacerbated where, as is common, the shareholder is entitled to disclosure of certain otherwise confidential company information under the company’s articles of association or a relevant shareholders’ agreement. In those circumstances, there may be confusion as to whether or not the appointed director can provide information to his appointing shareholder. It appears to be accepted that the appointed director can provide information to the appointing shareholder in its best interests, provided that the director also considers that the provision of that information to the appointing shareholder is in the best interests of the company (Hawkes vs. Cuddy [2009] 2 BCLC 427).

Apr-Jun 2015 issue

Herbert Smith Freehills LLP