Confidentiality and Post Employment Obligations

Directors Obligations to Protect Corporate Information: Confidentiality and the Use of Corporate Information

We regularly receive requests for advice from company directors and officers, of both private and publically listed entities. Whilst there are a range of separate disclosure obligations applicable to public companies and a host of duties and obligations placed on directors and other officers of corporate entities, which is far too broad to canvass within the scope of this article, we are often asked to advise on the ability of employees, offices and directors to compete with their former employer. The position is far clearer where there are existing contractual protections in the form of restraints and specific contractual confidentiality obligations. But what is the position, where there are no such contractual restrictions?

The obligations places on directors and officers are extensive and as is often the case, poorly understood. Where a breach of directors’ duties occurs, the impact can be significant for the company, its shareholders and the director concerned.

The traditional view is that directors owe fiduciary duties to the company as a whole, and in some circumstances, this can include the interests of future members. The legal duties and obligations of directors and other officers derive from the following sources:

  1. statutory duties, primarily being those contained in the Corporations Act 2001 (Cth) (“Corps Act”);
  2. common law duties;
  3. contractual duties if there is a contract of employment;
  4. a company’s constitution; and
  5. equitable duties.

Under the Corps Act, duties are owed to the relevant corporation including all shareholders (and in some cases its creditors). In very broad terms, the principal statutory duties imposed on a director of an Australian company may be summarised as follows:

  1. to exercise the degree of care and diligence that a reasonable person with the same responsibilities within the company would exercise in the company’s circumstances (section 180 of the Corps Act);
  2. to act in good faith and in the best interests of the company and for a proper purpose (section 181 of the Corps Act);
  3. to not improperly use the director’s position or information obtained as a director for the purpose of gaining an advantage for the director or any third party or to cause detriment to the company (section 183 of the Corps Act);
  4. to avoid actual or perceived conflicts between the obligations owed by the director to the company and the director’s personal interests or other duties to which the director may be subject (section 191 of the Corps Act);
  5. to keep confidential information confidential, and not to profit from advantages or business opportunities acquired in the position as a director (section 182 of the Corps Act);
  6. to prevent insolvent trading by the company (section 588G of the Corps Act); and
  7. not to acquire or dispose of company shares (or enter into agreements to do so) or procure a person to deal in company shares or communicate information that would allow another person to procure or deal in company shares (section 1043A of the Corps Act).

The duties and obligations outlined above require compliance by directors and other company officers, and civil and criminal liabilities may flow as a result of a contravention of the relevant Corps Act provisions. This applies to directors and officers who aided, abetted, counselled, procured, induced, conspired or were knowingly concerned (by act or omission) in a contravention of the Corps Act.

Each of the above duties is distinct from one another and have been well-developed by the Courts. In the employment context, however, where a director is also an employee and wishes to exit their employment it is essential that careful regard be given to the scope of the director’s surviving obligations to their former employer.

In these circumstances, amongst other obligations, a director (although this will also apply to employees generally) will be at risk of falling afoul of section 183 of the Corps Act which prevents the improper use of corporate information, if a director misuses information they acquired as a result of their position. For example, if they were to make an unauthorised disclosure or exploit the information for their benefit (or the benefit of a third party) or improperly cause detriment to the company, they may be liable for damages and penalties. It is important to note that this provision prevents the misuse of any corporate information, irrespective of whether it is confidential or not. As such, it can be far broader than a confidentiality clause contained in a contract of employment, which usually only seeks to protect confidential information. Significantly, under section 184(3) of the Corps Act, where a person obtains information because they are (or were) a director, officer or employee of a company and uses corporate information dishonestly and with the intention of gaining an advantage for themselves or causing detriment to the company (or does so recklessly as to whether the use would have this result), may be subject to criminal prosecution by the Australia Securities and Investment Commission and be liable to a fine of up to $340,000, or sent to prison for up to 5 years, or both.

A well-known example of a breach of this statutory duty arose in ASIC v Vizard [2005] 219 ALR 714, in which the Court held that Mr Vizard used corporate information obtained by reason of his position as a director of Telstra Corporation Limited (“Telstra”) to buy shares in Telstra and thereby made improper use of that information. By way of background to this case, in 2000 Mr Vizard was appointed a non-executive director of Telstra. He had also established a company called Creative Technology Investments Pty Ltd (“CTI”), of which his accountant was the sole director and shareholder. In December 1999, Brigham Pty Ltd (“Brigham”) a trustee company of CTI whose shares were beneficially owned by Mr Vizard, his wife and children, entered into a loan agreement by which it made loans to CTI from funds provided by Mr Vizard to purchase a share portfolio. The share portfolio acquired by CTI, on the instruction of Mr Vizard, included the purchasing of shares in entities for which Telstra had interests, and as such, Mr Vizard was privy to confidential information about those entities in his capacity as a director of Telstra. Accordingly, the Court held that Mr Vizard made improper use of that information by basing his decision to purchase or sell shares on the information to obtain an advantage for CTI (and through that company for Brigham, Mr Vizard and his family). In this case, the Court was satisfied that three separate breaches of section 183 of the Corps Act took place, and imposed a pecuniary penalty of $130,000 for each breach of director’s duty (a total of $390,000) and also imposed an order disqualifying Mr Vizard from managing companies for a period of 10 years.

We note that section 183 of the Corps Act applies to directors, officers and employees. However, it is most often used to prevent the misuse of information by ex-directors and officers of corporate entities. In addition to section 183, directors have equitable and fiduciary obligations to their old companies which will continue to apply after they have resigned as a director.

It is essential that directors respect, in addition to any contractual obligations regarding the maintenance of confidential information arising under a contract of employment, deed of indemnity or company policies, the statutory prohibitions on the use of information generally acquired as a director and employee. Improper use of corporate information will give the company and its shareholders, in the absence of anything further, a legitimate basis to commence proceedings to recover damages resulting from a breach.

It is fundamental for directors and officers to consider all their duties and obligations to the company upon ceasing to be employed, as the source of such obligation goes beyond the contract of employment. For employers, it is vital to ensure that employment agreements and policies contain appropriately and carefully drafted duties, confidentiality obligations and post-employment restrictive covenants to ensure the business is protected even after a director or employee ceases to be employed.

If you wish to discuss any aspect of this article or require specialist advice or assistance in relation to an employment law matter, please do not hesitate to contact us.

This alert is not intended to constitute, and should not be treated as, legal advice.

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