How Brunninghausen v Glavanics (1999): Duty in Small Companies

Brunninghausen v Glavanics

Brunninghausen v Glavanics (1999) 46 NSWLR 538 is a pivotal case.

Case Snapshot: Directors generally owe fiduciary duties to the company, not individual shareholders. However, when special circumstances exist—such as direct dealings in share sales involving superior info, familial or trust-based relationship, and vulnerability—a fiduciary obligation to the shareholder may arise.

Citations: [1999] NSWCA 199; (1999) 46 NSWLR 538
Judges: Priestley JA, Handley JA and Stein JA
Date: 23 June 1999
Court: New South Wales Court of Appeal
Legal Focus: Corporations Law, Fiduciary Duties of Directors, Disclosure Obligations

Key Facts of Brunninghausen v Glavanics

Mr Brunninghausen (“B”) and Mr Glavanics (“G”) were brothers‑in‑law and directors of a private ski-import company.

B held 5,000 shares and was the sole active director; G had 1,000 shares and little involvement.

As their personal relationship deteriorated, G agreed to sell his shares to B—and he resigned as director.

Unbeknownst to G, B had already entered a deal to sell the entire company to a third party before the share transfer.

After G transferred his shares (and resigned) at a low undervalued price, B sold the business for a significantly higher price.

G felt misled because he was unaware of the third‑party offer.

Legal question

Can a director owe a direct fiduciary duty to a fellow shareholder under specific circumstances?

Court of Appeal Decision (Brunninghausen v Glavanics)

The Court of Appeal held that B did owe a fiduciary duty to G.

This is because –

  • Only two shareholders existed (closely-held).
  • Their relationship was based on familial ties.
  • The share sale was direct between the director and the shareholder.
  • B had exclusive, superior information about the pending business sale.
  • G remained a nominal director only and was vulnerable due to lack of that information.

By failing to inform G of the potential company sale, B breached his fiduciary duty. The breach enabled him to acquire the shares at a low price before making a significant profit from selling the business.

The case was an exception to the principle laid under Percival v Wright [1902].

While Percival established that directors generally owe duties to the company, not individual shareholders, Brunninghausen recognized a rare exception when specific relational and informational imbalances exist.

Important Quotes from the Case

On company vs shareholder duty:

“Where a director’s fiduciary duties are owed to the company this prevents the recognition of concurrent and identical duties to its shareholders covering the same subject matter. However, this should not preclude the recognition of a fiduciary duty to shareholders in relation to dealings in their shares where this would not compete with any duty owed to the company.”

(By Handley JA at para 58)

On vulnerability and asymmetry of Information:

The defendant, as the sole effective director, occupied a position of advantage in relation to the plaintiff. He could, if he saw fit, disclose information about the pending negotiations for the sale of the business but could not be compelled to do so. This gave him the capacity to affect the interests of the plaintiff “in a practical sense”, and in the context of the negotiations with him “a special opportunity” to exercise that capacity to the detriment of the plaintiff who was “at the mercy” of the defendant and “vulnerable to abuse” by the defendant “of his position”.

(By Handley JA at para 99)

List of references:

YOU MIGHT ALSO LIKE:

Dodge v. Ford Motor Co. | A Landmark Corporate Law Case
Re Smith & Fawcett Ltd [1942]: Directors’ Duties & Discretion

MORE FROM CORPORATE LAW:

Leave a Reply

Your email address will not be published. Required fields are marked *