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K&L GATES LLP 925 FOURTH AVENUE SUITE 2900, SEATTLE, WA 98104-1158 MEMORANDUM TO: Washington State Bar Association Legislative Committee and WSBA Board of Governors FROM: Business Law Section and Corporate Act Revision Committee DATE: September 24, 2014 RE: Proposed Amendments to the WBCA dealing with Corporate Opportunities The Corporate Act Revision Committee (CARC) believes the Washington Business Corporations Act (WBCA) should be amended to: (1) incorporate specific approval mechanisms providing safe-harbor protections for a director or officer considering involvement in a business opportunity that might be deemed to be a “corporate opportunity”; and (2) permit corporations to include in their articles of incorporation a provision that limits or eliminates a director’s or officer’s duty to present a business opportunity to the corporation. Business Opportunities The CARC proposes amending the WBCA to incorporate specific approval mechanisms providing safe-harbor protections for a director or officer considering involvement in a business opportunity that might be deemed to be a “corporate opportunity.” The corporate opportunity doctrine is a common law doctrine that prohibits directors or officers from appropriating for themselves business opportunities that rightfully belong to the corporation. If applicable, the corporate opportunity doctrine recognizes that, as between the corporation and a director or officer, the corporation has a prior right to certain business opportunities that come to the attention of the director or officer. If the director or officer acts on the “corporate opportunity” without first presenting it to the corporation, the director or officer may be held to have “usurped” or “intercepted” the opportunity with consequent liability to the corporation. Conversely, if the director or officer fully discloses the opportunity (along with his or her interest in it) to the corporation, and the corporation properly “rejects” or renounces the opportunity, then the director or officer may freely appropriate the project without incurring liability. The WBCA currently does not include a provision specifically allowing a director or officer to pursue a business opportunity after it has been fully disclosed to the corporation and the corporation has rejected it. Although this is generally a common law doctrine, the case law in Washington is not particularly well developed with respect to this doctrine and the lack of a provision in the WBCA means that directors and officers do not have an absolute safe-harbor from potential liability. The MBCA and many states have adopted specific statutory procedures MEMORANDUM Page 2 [May 29, 2014] by which the corporation can renounce its rights to pursue specific business opportunities brought to their attention by a director or officer. Under these procedures, if the director or officer provides complete disclosure of the specific relevant opportunity and disinterested directors or shareholders renounce pursuit of the opportunity, the relevant director or officer is free to pursue the opportunity. These procedures are similar to those applicable to interested director transactions under the WBCA. The CARC believes that adopting safe-harbor provisions similar to those of the MBCA with respect to the renouncement of specific business opportunities will allow corporations and their directors, officers and legal advisors to operate with greater certainty while providing adequate protection for the shareholders. Advance Action to Limit or Eliminate Duties Regarding Business Opportunity In today’s investment environment, the corporate opportunity doctrine can be an impediment to venture capital funds or private equity groups investing in corporations. These investors typically have multiple investments in the same area of activity. They are generally willing to invest significant sums in businesses but often do so only if they are able to have a manager serve on the portfolio company’s board of directors. However, the corporate opportunity doctrine raises questions as to whether the fund managers who serve on a portfolio company’s board of directors may, by that very fact alone, have precluded themselves and their fund from making investments in other companies operating in the same industry space as the portfolio company. In response to these types of concerns, in 2000, Delaware amended its General Corporation Law by adding Section 122(17) to permit a corporation to renounce in advance, either in its certificate of incorporation or by action of the board of directors, any interest in specific corporate opportunities or classes or categories of corporate opportunities. Section 122(17) in effect permits a corporation to limit the scope of the opportunities to which it lays claim, even in advance of those opportunities actually arising. The Delaware legislative effort occurred against the backdrop of a Delaware court decision, Siegman v. Tri-Star Pictures, Inc., C.A. No. 9477 (Del Ch. May 5, 1989, revised May 30, 1989), which called into question the ability of a corporation to renounce corporate opportunities in advance (that decision appears not to have questioned the ability of a company to renounce a specific opportunity once it has arisen). Since Delaware’s adoption of statutory provisions permitting corporations to renounce, in advance, certain specified opportunities or classes of opportunities to which the corporation would otherwise be entitled, a number of other states have amended their corporate statutes to enact similar provisions, including Texas, Oklahoma, New Jersey, Nevada, Missouri, and Kansas. Many commentators have recommended that venture funds and other enterprises that invest in a host of companies (and who frequently appoint individuals to serve on the board of numerous related entities) select one of these jurisdictions as the jurisdiction of incorporation for the entities in which they invest. Similarly, the ABA Committee on Corporate Laws has recently proposed amending the Model Business Corporation Act (MBCA) to incorporate provisions allowing corporations to include in their articles of incorporation a provision renouncing any, or one or more classes, of corporate opportunities with respect to directors and, following further approving action by the board of directors, with respect to officers. MEMORANDUM Page 3 [May 29, 2014] Washington companies have benefitted from both venture capital and private equity funding. Members of the CARC have regularly seen such investors ask for advance protection against claims of taking corporate opportunities. Washington corporate law does not provide a clear and easy way for providing such protection and in some cases, prospective investors cite this as a further reason for using Delaware corporations. In many cases, requiring directors or officers to seek disclaimers for each corporate opportunity on a case-bycase basis can be a time-consuming process, can mean disclosure of confidential information, and is a process the outcome of which is often unpredictable for all of the parties involved. The CARC believes that amending the Washington Business Corporations Act (WBCA) to include provisions similar to those proposed for the MBCA would eliminate the timeconsuming process that currently must be followed by corporations, afford directors and officers greater protection from potential liability, and encourage venture fund, private equity and other investors with Washington-based investments to select Washington as the jurisdiction of incorporation for their business interests.