The tort of misappropriation of corporate opportunity pits the fiduciary duties owed by a director and officer of a corporation against the entrepreneurial freedom of business people, the best and brightest of whom often act in multiple directorships. A recent case out of Alberta, 681210 Alberta Ltd. v. Hunter, 2011 ABQB 320, emphasizes the sometimes restrictive scope of those duties and the strictness with which they will be applied in the context of private commercial ventures.
"Wherever there is danger, there lurks opportunity; whenever there is opportunity, there lurks danger. The two are inseparable." Earl Nightingale
Facts:
The Defendant Daniel Hunter was interested in opening up a movie theatre business in Okotoks, a bedroom community of Calgary. He lacked the required funds to finance the venture, so he drafted a business proposal outlining the costs and projected revenues of a 2 screen theatre and the financing required, in order to attract investors and bank financing. The proposal indicated that the business would serve the people of Okotoks and area, and outlined as one of the possible threats to the business, the competition presented by new theatres that might emerge in south Calgary. There was no mention in the proposal of any intention to expand the business beyond a theatre in Okotoks.
Hunter incorporated the Plaintiff corporation, Okotoks Cinemas, with himself as the sole director and officer, and successfully sought private financing from 10 prospective investors. While Hunter denied it, the investors claimed that they were enticed to invest based, in part, upon the vision Hunter had communicated to expand the business to other locations outside of Okotoks. No share purchase or unanimous shareholders agreements were entered into. By early 1996 the movie theatre was opened with Hunter, who retained the majority shareholding, acting as general manager.
Shareholders' meetings were held annually but as with many small, privately held companies, were informal. At the shareholders' meetings, the topic of expansion of the business to other locations was raised by the minority shareholders, along with complaints about the salary being paid to Hunter as the general manager. Hunter deflected these criticisms by pointing out that he was being paid for doing more than "flogging popcorn", he was being paid to grow the business.
At one meeting, an investor raised the possibility of expanding the business to a recently vacated location near Canyon Meadows in south Calgary. Hunter indicated that he would look into it but no efforts were made to investigate the location further. Shortly after, Cineplex Odeon opened a 10 screen multiplex theatre, the Canyon Meadows Cinemas, in the same location.
The financial results from the first few years of operations were not as hoped, but by 1999, Okotoks Cinemas began to make a small profit. The subject of the performance of the Canyon Meadows Cinemas was discussed at shareholders' meetings, it being noted that Okotoks Cinemas could continue to compete with Canyon Meadows Cinemas on ticket price and that the Cineplex was struggling due to competition from a nearby Famous Players theatre.
In March of 2001, the shareholders gave evidence that a special meeting was held at which Hunter sought and received shareholders' permission to pursue expansion opportunities and obtained the commitment of the shareholders to inject new capital into the company for this purpose. No specific locations or capital amounts were discussed and no written resolution was recorded.
At the August 2001 annual general meeting, Hunter announced to the shareholders that he had obtained the Canyon Meadows Cinemas location for himself and that he had not come to the investors because he did not require their capital to acquire the opportunity. While he later offered certain of the shareholders a chance to purchase an interest in the Canyon Meadows opportunity, no proper disclosure of the opportunity was made and no approval was sought from the shareholders at any time to pursue the opportunity in his personal capacity (approval of the board of directors was not sufficient as Hunter was the only director).
At trial, Hunter defended on the basis that the business of Okotoks Cinemas was never intended to expand beyond Okotoks and that he did not become aware of or pursue the Canyon Meadows opportunity while acting in his capacity as a director or officer of Okotoks Cinemas.
Issue:
The main issue in the case at bar was whether the Canyon Meadows opportunity rightly belonged to the Plaintiff.
Outcome:
The Court held that Hunter had breached his fiduciary duty to act in the best interests of Okotoks Cinemas by acquiring the Canyon Meadows opportunity for his personal benefit.
The Court asked whether Hunter could act in the best interests of both Okotoks Cinemas, of which he was the sole director and officer, and of the Defendant corporation that had acquired the Canyon Meadows opportunity. The Court found that he could not, citing the leading authority on corporate opportunity cases, Canadian Aero Service Ltd. v. O'Malley, [1974] S.C.R. 592 ("Canaero"), which held that key factors in the determination of whether the opportunity belonged to the company were: (a) the position held by the fiduciary; (b) the nature of the opportunity, whether it could be considered a "ripe" or "mature" business opportunity; (c) the relationship of the fiduciary to the opportunity, the circumstances in which it was obtained; and (d) the knowledge used by the fiduciary in obtaining the opportunity.
While the factors enumerated in Canaero were applied by the Court, the case at bar was distinguished from Canaero in that Okotokos Cinemas did not have a prior and continuing interest in the specific corporate opportunity but was interested at a more general level in expansion to other locations. The Canyon Meadows opportunity was held to be squarely in line with the "general business pursuits" of Okotoks Cinemas.
The Court also found the reasoning in Slate Ventures Inc. v. Hurley (1997), 37 B.L.R. (2d) 138 (NFCA) ("Slate") compelling. In particular, that the strict ethic imposed on directors and officers concerning corporate opportunities applied in the case of "potential opportunities" as well as maturing ones where the director or officer knew that the company he served was interested in opportunities of the kind taken. Together with the other factors open for the Court to consider from Slate, not just mature opportunities but style="text-decoration: underline;">potential opportunities taken by fiduciaries could result in liability, especially where the potential for conflict or competition of interests between the company and the opportunity existed.
The fact that Canyon Meadows began competing with Okotoks Cinemas on ticket price once it was acquired by Hunter was a key factor in the Court's decision that he had breached his fiduciary duty to the Plaintiff. Hunter and the Defendant company were ordered to disgorge all profits and benefits received from Canyon Meadows Cinemas.
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