First published on, September 2013.

Industry players on the look-out for the next big opportunity are often tapped for their expertise and connections to serve in management roles and as directors on boards of mining companies. However, a recent decision of the Supreme Court of British Columbia reminds directors and senior officers of the importance of steps that should be considered in an effort to protect themselves when pursuing certain opportunities for their personal benefit, as opposed to that of the corporation they serve.

The decision in First Silver

In the case of First Majestic Silver Corp. v. Davila, the Court awarded a hefty US$93.84 million judgment against a former director and officer of First Silver Reserve Inc. after his holding corporation indirectly acquired rights to a Mexican silver mine known as Bolaños. The Court found that the acquisition opportunity belonged to First Silver, the corporation to which he owed a fiduciary duty. As a result, the Court awarded equitable damages for the breach.

Directors and officers aware of buying opportunities are well advised to be cautious before pursuing deals if they know the corporation they serve was also considering that same opportunity. While the most obvious advice may be to avoid situations in which personal interests conflict with those of the corporation, business realities may require a more practical approach. While it is necessary to be alert to certain risks, there are some ways to reduce potential liability, while still considering these opportunities.

Practical approach

First, before personally pursuing an opportunity that may be of interest to the corporation, directors and officers should obtain consent from management and the board of directors of the corporation. The consent should confirm that the corporation is aware of the opportunity but has decided not to pursue it. Any delay or failure on the part of the corporation to act quickly enough should not be taken as a sign of lacking interest, especially when the board is monitoring the situation.

Next, consideration should be given to what a director or officer knows about the opportunity, even if acquired through past dealings, outside the scope of their work for the corporation. If the corporation decides to pass on an opportunity, the decision must be informed. This requires the individual in question to disclose to the corporation relevant information about the nature of the opportunity and the details of the deal. The consent obtained from the corporation should include an acknowledgement that full disclosure was provided.

Third, fiduciaries should keep in mind that their duty to act in the best interests of a corporation can extend beyond their resignation and that following their departure they may not be free to pursue an opportunity for themselves. A release can be obtained at the time of resignation. To help ensure against a court's narrow interpretation of such release, directors and officers should provide full and complete information to the corporation about the opportunity prior to its execution.

Last, full and complete disclosure by the fiduciary and transparency at all stages in an acquisition process will assist efforts which may be desirable to advance a defence strategy relying upon shared assumptions, informed consent and the corporation's decision not to pursue a corporate opportunity.

Assessment of damages

The method used by the Court to assess damages is also worth noting. The calculation of the corporation's loss was based upon an estimate of the mine's future income, calculated to exceed the actual purchase price for the acquisition of Bolaños by the individual's holding company. In addition, the Court assessed the corporation's loss with the benefit of hindsight, resulting in the increase of the award to account for increasing silver prices.

In conclusion, while directors and officers are free to pursue certain corporate opportunities for themselves, consideration should be given first and foremost to the duty owed to the corporation they serve. The manner in which an opportunity is pursued may make the difference between a successful venture and a very costly mistake.

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