Abstract
Section 141 of the Companies Act 1993 confers upon a company a power to avoid a self-dealing transaction between it and an interested director. The transaction cannot be avoided, however, if the company received "fair value". Additionally, in Sojourner v Robb the Court of Appeal concluded that for self-dealing transactions where s 141 is not engaged, the receipt of fair value modifies the application of equity's self-dealing rules and remedies to preclude a claim for an account of profits. The result is that the company's receipt of fair value operates not only as a safeguard against the inherent conflict of interest between the interested director and the company but provides protection to the director. For these reasons how fair value is determined is of considerable importance.
Not surprisingly the company's receipt of fair value is presumed when the transaction was entered in the ordinary course of the company's business and on usual terms and conditions. Here both objective considerations ("ordinary", "usual terms and conditions") and subjective considerations ("the company's business") are relevant. This article considers transactions that are not in the company's ordinary course of business.
A starting point for evaluating these transactions is an objective market test focusing on whether the value received by the company was within the range expected of purchasers generally. But even with this initial enquiry, subjective considerations are relevant, for example, in determining the characteristics of the market and, for those who do not see this as a market characteristic, if there are potential purchasers who may value that asset more than others. Gaining insights from case law considering the concept of fair value and the typical approach of United States (US) courts applying a fairness approach, this article suggests that a key subjective consideration inherent in the concept of fair value is whether, at the time of negotiations, the director knows (or should have known) that they are interested in the transaction. If so, it is considered that their interest should be disclosed to those negotiating on behalf of the company. This enables the company to both consider whether that director may see more value in the asset than others do and to factor this into their negotiations.