Leading Case of Brunninghausen v Glavanics

As to make the peace, Glavanics sold its share to his brother in law Mr Brunninghausen without any knowledge as to that he was in negotiation to sell the company at a high price. Brunninghausen have approached the third party with an offer to sell its business, unknown to Glavanics. The company was sold at a higher price but the shares of Glavanics were brought by Brunninghausen at less value. When this agreement was reached, at the same time, a transfer deed was also signed between Brunninghausen and Glavanics which stated that Glavanics is transferring its share to Brunninghausen and also resigns from the post of director. After two months, the business was sold by Brunninghausen.

Issue raised in the case

Galvanics raised the issue as to whether Brunninghausen have breached the fiduciary duty towards him to disclose the important fact that he was planning to sell the company at high price.

Claim by Glavanics

Glavanics claimed that there is a breach of fiduciary duty to disclose about the offer and it is a breach of Fair Trading Act of 1987 as Brunninghausen failed to disclose to Glavanics regarding the sale of business to the third party. Also Brunninghausen had fiduciary obligation to towards Glavanics when he agreed to sell its shares.

Claim by Brunninghausen

Brunninghausen claimed that Mr Glavanics was only negotiating in dark on the basis of external appearance of business and he knew about this fact. There was no relationship of the confidence between the two and their trust have been broken long ago so there is no fiduciary duty owed by Brunninghausen towards Glavanics.

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Lower court judgement

The court held that there was a fiduciary duty of Brunninghausen towards Glavanics to disclose the fact about the sale of the business. Glavanics has been locked out from activities of company and had no means to figure out the real value of the shares which he was selling. The fiduciary duty was owed by Brunninghausen as a director to Glavanics as the shareholder. After this judgement, an appeal was filed by Brunninghausen in the higher court.

Decision of Court of Appeal

The Court held that there was a fiduciary duty of Brunninghausen towards Glavanics. There are many reasons as to why directors do not owe any fiduciary duty towards the shareholders and owe fiduciary duty only towards the company. If the directors had any duty towards shareholders then the directors could be potentially liable to harassing the actions brought by the minority shareholders. Also the Court of Appeal held that the fiduciary duty which was owed by the director towards the company overrides the duty towards shareholders which comes in conflict.

The court also found that the family relationships created the position pursuant to which the court figured out that Glavanics would expect not be cheated by the non disclosure of the negotiation. Lord Handley JA opined that a director owed the fiduciary duty towards the shareholders when a negotiation takes place for the take over or acquisition of company's undertaking as it requires the director to be loyal in promoting the joint interest of all the shareholders. The conflict can only arise when the director prefer to keep its personal interest over the joint interest of the shareholders. However Brunninghausen lost the appeal.

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Conclusion from the case

It can be said that the fiduciary duty which the director owe towards the company is absolute and it is the job of director to monitor, guide and oversee the aspects of the business so that it can work in the best interest of a company. The duty which the director owes towards the shareholders is qualified and subject to the duties which is owed towards the company, if there comes any conflict. The directors must know that they owe some duties towards the shareholders also.