With Great Power Comes Great Responsibility...
A de facto director is someone who acts as a director of a company, but who has not been formally appointed as one. Acting as a director (despite not being appointed as one) comes with the responsibility of complying with various directors' duties, under both common law and Hong Kong legislation. These duties include acting in the best interests of the company, exercising care, skill and diligence in making decisions, avoiding conflicts of interest with the company, and not gaining any personal advantages or benefits by virtue of his/her position as a director.
In the recent case of South China Media Ltd and Others v Kwok, Yee Ning and Others  HKCU 580, a senior employee was found to have acted as a de facto director of the plaintiff company as a result of her position and responsibilities within the company. Consequently, the employee was held to be in breach of the fiduciary duties which she owed to the company by diverting business opportunities away from the company and making unauthorised use of the company's resources.
South China Media Ltd and Others v Kwok, Yee Ning and Others
Kwok was employed by the second plaintiff, SCM Management, as its "advertising director". She was primarily responsible for a magazine published by the third plaintiff, Whiz Kids.
The Court held that although Kwok was not formally appointed as a director of Whiz Kids, she was a de facto director as she had assumed the powers and functions of a director. The Court applied the objective test by looking at what the individual had actually done to assess whether she had assumed the responsibilities of a director and disregarded the individual's personal motivation and belief. The Court placed emphasis on Kwok's authority to negotiate and enter into contracts with clients, as well as the fact that she was held out as a "director" to clients (given her title of "advertising director") in concluding that she had acted as a de facto director of Whiz Kids.
As a de facto director, Kwok owed fiduciary duties to Whiz Kids, which included a duty not to usurp or divert business opportunities to another person or company with whom she is associated. Kwok was found to have diverted business opportunities to a company controlled by her husband, by providing him with a copy of a draft contract which he had used to make a similar offer to a mutual target client on behalf of his company.
Kwok was also found to have breached her duties of loyalty and fidelity to the company by allowing unauthorised use of the Whiz Kids name and logo by her husband's company. As a result of this conduct, Kwok was found to have placed herself in a position of conflict, acted for the benefit of a third party without the informed consent of her principal, and failed to act with single-minded loyalty to Whiz Kids - all duties which are owed by a director to a company.
In addition to breaching her fiduciary duties, Kwok was also found to have breached her post-termination restrictive covenants. The Court rejected Kwok's argument that the non-solicitation and non-competition clauses that formed part of the terms of her employment were too unreasonable, too wide, or too restrictive. The restrictions ran for a period of 12 months from the date of termination of Kwok's employment and were held to be no greater than were reasonably necessary to protect the group's legitimate business interests.
Kwok's husband and his companies were also held liable for dishonest assistance and procuring Kwok's breach of contract. Kwok's husband was aware of Kwok's position and responsibility with regard to Whiz Kids and should have known that it would be unlawful for a senior employee of the company to divert business opportunities to a competitor. The Court held that at the very least, Kwok's husband "…closed his eyes and ears; and deliberately refrained from asking questions about Kwok's misconduct". Kwok's husband's knowledge was imputed to his company. The defendants were ordered to pay Whiz Kids equitable compensation and SCM Management damages with interest.
Senior employees (who are not formally appointed as a director of a company) should be aware of the risk of being liable as de facto directors once they assume the full responsibilities and authorities of a director.
Whilst there is no one definitive test for a de facto director, the Courts will consider the position, function, and responsibilities of an employee in making a determination. Liability cannot be avoided by demonstrating that the employee truly believed, in good faith, that he or she was not acting as a director. Employees should therefore ensure that their role and functions are clearly defined and should not deviate from this in practice. They should also refrain from holding themselves out to clients and other third parties as "directors".
Employers should also be aware of this risk, and make sure to clearly define the role and functions of each employee. They should also ascertain whether their directors and officers liability insurance policies cover shadow and de facto directors.
Howse Williams Bowers is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach.
Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; and financial services/corporate regulatory and compliance.
As an independent law firm we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.
Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice. Please contact firstname.lastname@example.org if you have any questions about the article.