A few years ago, the Delaware legislature offered a new statutory provision designed to obviate potential problems caused by the corporate opportunity doctrine. The new provision (§122(17)) reads as follows:
Every corporation created under this chapter shall have power to: ... (17) Renounce, in its certificate of incorporation or by action of its board of directors, any interest or expectancy of the corporation in, or in being offered an opportunity to participate in, specified business opportunities or specified classes or categories of business opportunities that are presented to the corporation or one or more of its officers, directors or stockholders.
I have been wondering how frequently these provisions are being adopted. In the absence of systematic evidence, I appreciate anecdotes, like this one from NW Venture Voice. But the contract provision there has some problems.
In the event that a director of the Corporation who is also a partner or employee of an entity that is a holder of Preferred Stock and that is in the business of investing and reinvesting in other entities, or an employee of an entity that manages such an entity (each, a „Fundš), acquires knowledge of a potential transaction or matter in such person‚s capacity as a partner or employee of the Fund or the manager or general partner of the Fund and that may be a corporate opportunity for both the Corporation and such Fund (a „Corporate Opportunityš), then (i) such Corporate Opportunity shall belong to such Fund, (ii) such director shall, to the extent permitted by law, have fully satisfied and fulfilled his fiduciary duty to the Corporation and its stockholders with respect to such Corporate Opportunity, and (iii) the Corporation, to the extent permitted by law, waives any claim that such Corporate Opportunity constituted a corporate opportunity that should have been presented to the Corporation or any of its affiliates; provided, however, that such director acts in good faith and such opportunity was not offered to such person in his or her capacity as a director of the Corporation.
According to John, the company's lawyer said that this provision would "best protect the interest of venture investor board members, prevent conflicts and reduce disincentives to invest." Does it do that? Probably not.
To accomplish that feat, the provision should do what the Delaware statute envisioned: "Renounce ... [an] interest or expectancy of the corporation in ... specified business opportunities or specified classes or categories of business opportunities." This provision does not do that. Unless you want to contend that renouncing any interest in opportunities that do not belong to the corporation in the first place qualifies. The fact is that the provision simply replicates the current judge-made corporate opportunity doctrine -- the very doctrine the Delaware statute was intended to circumvent.
The key issue in this provision is whether the opportunity comes to the venture capitalist director when he is wearing his venture capitalist hat or when he is wearing his director hat. If he is wearing his venture capitalist hat, then the opportunity belongs to the venture capital firm (the Fund), not to the portfolio company. Presumably (though the provision doesn't say this), if he is wearing his director hat when he discovers the opportunity, then the opportunity belongs to the portfolio company, not to the venture capital firm.
The corporate opportunity doctrine can invoke various other considerations, but the big question is always this: whose opportunity is it? And that question would be decided by asking whether the person who became aware of the opportunity was acting as a director of the portfolio company or as a venture capitalist at the time. In short, the courts would ask the very question contemplated by this charter provision.
Will the provision reduce litigation? I don't see how it could, since the question remains whether the venture capitalist director took an opportunity that didn't belong to him.
Will the provision offer the venture capitalist director any protection from fiduciary duty claims? In a word, no.
Does this provision serve any purpose at all? Not that I can discern.Posted by Gordon at December 8, 2004 08:14 PM | TrackBack