Are waivers of corporate opportunities a good idea?
Alberta is the first Canadian jurisdiction to allow for them, but that will only increase the risk of putting directors in conflicts of interest.
The Government of Alberta launched its "Recovery Plan" in June 2020, as a response to – in the Government's words – the "worldwide pandemic, global recession, and collapsing world oil prices." The plan aims at diversifying the economy and attracting business and investment.
Part of the plan also includes changes to the Alberta Business Corporations Act (ABCA) via Bill 84, which may create more problems than they solve, both for corporations and directors, raising the potential for conflicts of interest.
Most concerning is the sweeping revision of the law governing the waiver of corporate opportunities. Under the current regime, the "corporate opportunity doctrine" prohibits officers or directors from diverting to themselves or their affiliates, any business opportunity that otherwise rightfully belongs to the corporation. A corporation can waive such opportunities on a case-by-case basis. The changes in Bill 84 will allow a corporation to waive (in advance) whole classes of business opportunities.
Unfortunately, the aims of efficiency and reducing administrative burdens will create changes to longstanding principles of law and equity that are core to the fiduciary obligations of directors.
The corporate opportunity doctrine derives from the general rule of equity that people who owe fiduciary duties should not be allowed to enter engagements in which they can have a personal interest that conflict with those of whom they are bound to protect. Every director and officer of a corporation must act in good faith, in the best interests of the corporation. Given the fiduciary nature of their position, they must be careful not to exploit opportunities they become aware of because of their position with the corporation. Courts in Canada and the United States have found directors to breach their fiduciary duties of loyalty by taking corporate business opportunities for themselves.
In its current form, the ABCA treats the interest of directors who pursue corporate opportunities on a case-by-case basis. Following the disclosure by a director or officer of interest in a material contract or transaction with the corporation, the corporation’s board may consider whether the opportunity is in the corporation’s best interests and may renounce the opportunity if not. Bill 84 seeks to shortcut this process by allowing corporations to waive, in advance, any interest in or expectancy to be offered a chance to participate in specified business opportunities, or a class of them. This would be achieved by providing for such power in a corporation's articles of incorporation or a unanimous shareholder agreement, or as the regulations may provide.
A notable change targets section 120 of the ABCA, which refers to interest in actual or proposed material contracts or material transactions with the corporation. Bill 84 expressly expands the scope to cover business opportunities that are offered or presented to one or more of the corporation's officers. Thus, it is now more certain that the corporation need not be aware of the relevant contract or transaction for it to fall within the scope of business opportunities. This expands what may constitute a conflict of interest between a corporation and its directors and officers under the ABCA.
Conversely, an exercise of the right to waive corporate opportunities would invariably authorize officers of the corporation to pursue any business opportunity that falls within the excluded category, without seeking the prior approval of the corporation. The waiver will apply whether or not the corporation is aware of the opportunity, and in circumstances that would otherwise clearly constitute a conflict of interest.
It can be problematic for individuals who serve as directors and officers of multiple organizations to ensure they are not taking advantage of corporate opportunities, or perceived to be doing so. Venture capital and private equity firms commonly invest in multiple business opportunities in the same area of activity. They typically get board seats in as a condition of their investment. Without the ability to rely on the type of advance waiver of corporate opportunities contemplated under Bill 84, the investor-directors could be liable to the corporation for outside investments falling in the same area of the corporation's business activities. On the other hand, the flexibility that comes with the option of advance waiver of corporate opportunities may also lead to real competition and conflict of interest issues that may arise from the usurpation by officers, of corporate opportunities that could have benefited the corporation.
There are factors the courts have considered in determining whether an opportunity qualifies as a corporate opportunity and whether that triggers a breach of fiduciary duty. Is the opportunity in the same line of business? Does the corporation have an interest in the opportunity and the ability to take it up? Does the opportunity create a conflict of interest, or would it result in a breach of fiduciary duties? Most of these factors become redundant in the face of an advance waiver.
Alberta is the first Canadian jurisdiction to allow for corporate opportunity waivers, similar to several U.S. jurisdictions where corporate opportunity waivers are permitted. Officers, directors, and private equity investors who are also on boards in other provinces, which have not enacted legislation permitting corporate opportunity waivers, will still be required to obtain the approval of the corporation to ensure that there is no breach of their fiduciary duties. Further, officers, venture capital and private equity investors who wish to pursue business opportunities that do not fall within a class excluded by an Alberta corporation’s corporate opportunity waiver would still have to seek the prior approval of the Alberta corporation before taking up those opportunities.
The waiver of business opportunities under Bill 84 is made subject to regulations which set safeguards to address potential conflicts of interest, including the power of the corporation to modify or revoke a waiver. Unfortunately, the safeguard raises a host of issues which threaten to increase uncertainty and disputes and may undermine Alberta corporations' ability to pursue actual conflicts, and may undermine the fiduciary relationship itself.