Cook v Deeks [1916] 1 A.C. 554, 564
Citation: Cook v Deeks [1916] 1 A.C. 554, 564
Rule of thumb: Can directors enter into contracts on behalf a the company with an organisation they have a conflict of interest in? No - directors must obtain permission of shareholders to take part in transactions which could be deemed to create a conflict of interest, otherwise the directors will be held financially liable for this.
Judgment:
Directors must obtain permission of shareholders to take part in transactions which could be deemed to create a conflict of interest, otherwise the directors will be held financially liable for this. The facts of this case were that the directors Deeks and Hinds worked for a railway company. They were provided with the opportunity to build railways for the Government as part of an infrastructure project. Deeks and Hinds then entered contracts to build the railway lines in their own name. Deeks and Hinds held shares in the company and used a company meeting to use their shares to reject the offer to do the building. Cook was also a shareholder in the company, and he sued Deeks and Hinds under a minority shareholder action. The Court held that this constituted unfair prejudice on the minority and Deeks was able to obtain suitable redress from these former directors for the loss of the opportunity to make profits on this contract, ‘Where the Privy Council also observed 'if directors have acquired for themselves property or rights which they must be regarded as holding on behalf of the company, a resolution that the rights of the company should be disregarded in the matter would amount to forfeiting the interest and property of the minority of shareholders in favour of the majority, and that by the votes of those who are interested in securing the property for themselves. Such use of voting power has never been sanctioned by the Courts' (emphasis added). By implication, such a resolution would be effective if it was not passed by 'votes of those who are interested in securing the property for themselves'’. Lord Buckmaster
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