Cook v Deeks [1916] 1 AC 554

Facts

  • The Toronto Construction Company customarily secured contracts from the Canadian Pacific Railway.
  • Four directors, including Deeks, negotiated a new railway construction contract and assigned it to a new company they created, excluding the fifth director, Cook.
  • The directors, constituting a majority, passed a shareholder resolution stating that the Toronto Construction Company had no interest in the new contract.
  • Cook, as a minority shareholder and director, opposed his exclusion and challenged the validity of the majority’s resolution.

Issues

  1. Whether the directors breached their fiduciary duty by diverting a business opportunity belonging to the company for their personal benefit.
  2. Whether a majority shareholder resolution could legally ratify the directors’ diversion of the opportunity and thereby prejudice the rights of a minority shareholder.

Decision

  • The Privy Council found that the four directors breached their fiduciary duty by appropriating a corporate opportunity for their own benefit.
  • The new contract secured by the directors was held to rightfully belong to the Toronto Construction Company.
  • The majority shareholder resolution purporting to ratify the directors' actions was declared invalid, as it operated to the unfair detriment of Cook, the minority shareholder.

Legal Principles

  • Directors owe a strict duty of loyalty and must not put their personal interests above those of the company.
  • The corporate opportunity doctrine prohibits directors from misappropriating business opportunities that properly belong to the company.
  • Shareholder ratification is invalid where it authorises actions that constitute a breach of fiduciary duty or unfairly prejudice minority shareholders.
  • Directors remain accountable for breaches of duty, even if the company has not acted or cannot immediately act upon the opportunity in question.

Conclusion

Cook v Deeks establishes that directors who divert company opportunities for personal gain are in breach of their fiduciary duties, and majority shareholders cannot legitimize such conduct at the expense of minority rights.

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