Audit, Compliance and Risk Blog

Corporation’s Failure to Bid on Project Does Not Excuse Director

Posted by Ron Davis on Wed, Dec 21, 2016

Gavel 3.jpgA recent appeal before the Manitoba Court of Appeal highlights the strictures placed on directors with respect to corporate opportunities. In Matic v. Waldner (2016 MBCA 60), the dispute concerned the opportunity to bid on a construction project for one of Manitoba’s First Nations. Ante Matic (Matic) and Paul Waldner (Waldner) agreed to purchase Springhill Lumber Wholesale Ltd. (Springhill) from its previous owners, with Waldner having a 70% interest, and Matic having a 30% interest and acting as Springhill’s general manager. Springhill’s main customers were First Nations, primarily in northern Manitoba. In addition to supplying construction material, Springhill would sometimes also act as general contractor for construction projects for the First Nations.

After the sale closed, Matic, Waldner and William Waldner became directors and officers of Springhill. However, relations between Matic and Waldner deteriorated, leading to the dismissal of Matic as Springhill’s general manager and the failure to take the necessary steps to transfer a 30% shareholding to him.

Litigation ensued with Waldner claiming that Matic breached his fiduciary duty to Springhill by diverting the opportunity to act as general contractor for a construction project for the Keewaywin First Nation from Springhill to Callidus Construction Group Ltd. (Callidus), a company owned by Matic. Matic, in turn, claimed that Waldner had breached his fiduciary duty to Springhill by operating a competing business, Prairie Post Frame Construction Ltd. (Prairie Post). However, the Court held that Matic had not complied with the proper procedure to bring such a derivative action for Waldner’s breach of fiduciary duty to Springhill. Matic had not sought the leave of the court to bring such an action and such leave is mandatory under Manitoba corporate law.

As far as the claim that Matic breached his fiduciary duty to Springhill, the trial judge had dismissed this claim because he concluded: “Springhill had no intention to open and operate a construction division, while Tony Matic was general manager, is supported by the fact that I heard no evidence that Springhill is operating a construction division or doing construction projects at the present time.” The Manitoba Court of Appeal noted that the fiduciary duty of corporate directors requires them to avoid conflicts between their interests and those of the corporation. A clear example of such a conflict would be when a director obtains a business opportunity belonging to, or being pursued by, the company without its consent. The Court considered whether the duty applied when an opportunity was merely potential or when the corporation was not actively pursuing it. The Court concluded “a breach of fiduciary duty can occur when the diverted opportunity is a potential, rather than a mature opportunity, or one that the corporation is not actively pursuing.”

In this case, the trial judge concluded that the opportunities did not belong to Springhill because it was not pursuing the general contractor business. The Court of Appeal found that there was evidence Springhill was active in the business both before and after Matic was a director. It held that the opportunity on the Keewayin project was mature with the construction contract with Callidus being concluded within a month of the building materials order with Springhill. The Court also found that Springhill did not pursue the opportunity because only Matic knew of the opportunity and he did not advise the other directors about it. Because Springhill had acted as general contractor on First Nations projects before Matic, the Court held that the opportunity was in its line of business and it had the capacity to perform the work. Matic did not have the informed consent of Springhill to divert the opportunity to Callidus and the Court held that he did so in breach of his fiduciary duty to Springhill. It referred the question of damages from the breach to the trial court. Typically the director can be required to disgorge any profit made from the opportunity to the corporation.

Directors involved in multiple operating entities within the same type of business need to carefully consider any potential conflicts of interest. If there are any doubts, full disclosure to the corporation’s board and express consent to proceed is the only defense available if the a conflict of interest and duty is found to exist.

STP has recently published an update to its publication Directors' Liability in Canada and also publishes the following related guides:

Like What You've Read? Subscribe to Our Blog Now

About the Author
Ronald Davis is an associate professor emeritus at the Peter A. Allard School of Law, University of British Columbia. He obtained his Bachelor of Laws degree from the Faculty of Law, University of Toronto in 1990, graduating as that year’s silver medalist. He was called to the Ontario Bar and practiced law in Toronto for 10 years before returning to graduate studies at the University of Toronto. See www.stpub.com for a full bio of Ronald Davis.

 

photo credit: ccPixs.com 3D Judges Gavel via photopin (license)

Tags: directors & officers, Canadian