Attorney Dr. Fahad Al-Shammari
Associate Professor of Commercial Law, Kuwait University
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1. Duty of Loyalty and Corporate Opportunities

The Duty of Loyalty obliges a member of the board of directors of a public joint-stock company not to place themselves in a position where their financial interest conflicts with the financial interest of the company. This includes refraining from exploiting corporate or investment opportunities for their own benefit or for the benefit of relatives, while the company itself has the capacity to pursue these opportunities for profit.

At the core of the duty of loyalty is the concept of corporate opportunities (The Corporate Opportunity). The question arises: which opportunities belong to the company, such that a board member must refrain from exploiting them? In other words, does every business opportunity seized by a board member during their tenure constitute a breach of loyalty and a violation of the non-compete obligation?

2. Judicial Standards for Corporate Opportunity

Several judicial standards have been developed to determine whether a board member has improperly exploited a corporate opportunity:

1. The Fairness Test (1940s, U.S.)

   • Originating in the United States in the early 1940s, this test holds that a board member may breach loyalty if they exploit a corporate opportunity without adhering to standards of fairness and ethics.

   • Under this principle, a board member is considered a fiduciary of the company’s assets, expected to pursue profits for the company and its shareholders rather than their own personal gain, even if the opportunity falls outside the company’s core business.

2. The Interest Test

   • Focuses on the financial interest of the company. A board member may not exploit a corporate opportunity if it would financially benefit the company and its shareholders.

   • Limitation: It considers only the company’s interest, without accounting for other factors such as the company’s capacity to exploit the opportunity.

3. The Line of Business Test

   • Considers whether the opportunity relates directly to the line of business the company engages in according to its articles of incorporation.

   • A board member violates their duty if they exploit an opportunity within the company’s business scope while the company is financially capable of pursuing it.

   • Questions raised under this standard:

     • Would the opportunity financially benefit the company?

     • Does the opportunity fall within the company’s line of business?

     • Is the company financially able to exploit it?

This test recognizes that an opportunity may fall within the company’s business line but may not be beneficial due to lack of alignment with the company’s short- or long-term plans, or because the company is financially incapable of pursuing it. In such cases, the board member’s exploitation of the opportunity may not harm the company or constitute a conflict of interest.

3. Kuwaiti Legal Framework

The Kuwaiti legislator has incorporated multiple standards in regulating the duty of loyalty under the New Companies Law:

1. Interest-Based Standard

   • Article 199 prohibits direct or indirect personal interest in contracts or transactions entered into by the company unless authorized by the general assembly. This includes interests of board members, executive management, their spouses, or second-degree relatives.

2. Line of Business Standard

   • Article 197 prohibits a board member from holding membership in competing companies, engaging in competitive activities, or trading in sectors in which the company operates.

Limitations of the Kuwaiti regulation:

• The law does not require the company to be financially capable of exploiting the opportunity.

• The law does not require that the opportunity would financially benefit the company.

This raises practical questions: Should a board member abstain from exploiting an investment opportunity even if the company lacks the financial capacity to pursue it? The answer is likely no, because if the company could not exploit the opportunity anyway, the board member’s personal pursuit does not cause harm or a conflict of interest.

4. Conclusion

The duty of loyalty prevents board members from exploiting corporate and investment opportunities only when the company could reasonably benefit from them. Where the company lacks capacity or the opportunity does not align with its financial interests, board members are not necessarily breaching their duty.

This nuanced understanding balances protecting the company’s interests while recognizing practical limitations on its ability to act.

Attorney Dr. Fahad Al-Shammari
Associate Professor of Commercial Law, Kuwait University
This email address is being protected from spambots. You need JavaScript enabled to view it.