EC Corporate Governance Initiative Series: 'Corporate Opportunities Rules, Long-termism and Sustainability'
The study on directors’ duties and sustainable corporate governance by Ernst&Young analyses the regulative alternatives for promoting long-termism and sustainability, by way of setting appropriate incentives to the adoption by corporate directors of industrial and financial strategies consistent with such objectives. Corporate opportunity rules are a component of the directors’ (and in some legal systems of the controlling shareholders’) duty of loyalty to the corporation, that prevents directors (and in some jurisdictions, controlling shareholders) from exploiting business opportunities in which the corporation may have an interest, without a corporation’s authorization or ratification. Corporate opportunity rules can be framed within ‘option C’, as identified by the abovementioned study—ie the so-called legislative hard option. In one of my articles, I show that two variants of the corporate opportunities doctrine, the ‘line of business’ test and the ‘conflict of interest’ test, allow a corporation to withhold within its proprietary boundaries those business opportunities that are industrially complementary to the corporate ongoing concern. Such normative choice is fully in line with the objective of facilitating and securing a corporation’s long-term development. It also contributes to hedge hold-up costs deriving from sunk investments, by way of shielding the corporation from potential internal competition by its fiduciaries.
Corporate opportunity rules have been introduced in many continental European corporate laws, especially throughout the last two decades. Nonetheless, in most cases, they are not assisted by remedies that are as efficient as the ones employed in Anglo-American corporate law (ie accounting/disgorgement of profits assisted by constructive trust and profit tracing). Introducing more cogent corporate opportunity remedies, as discussed in one of my articles, may be seen as a way of securing the corporate proprietary boundaries and therefore easing corporate planning consistently with long-termism and sustainability. In fact, the investment in an environmentally friendly productive activity may well entail an increase in sunk costs (more expensive plants) and therefore an enhanced need for the protection of corporate opportunities, consistent with what has been argued above. Such an enhanced protection—by way of introducing more efficient sanctions for breach of corporate opportunity rules—is not likely to be a cost-free choice from a policy perspective.
US jurisprudence has pointed at the drawbacks connected to corporate opportunity rules, especially when applied within highly innovative environments. Venture capital funds’ general partners who sit on the board of competing start-ups often find themselves in a situation of divided loyalty in relation to corporate opportunities (Woolf (2017)). Delaware corporate law (followed by several other US corporate laws) has introduced the possibility of a waiver for corporate opportunity rules (DGCL 122(17)) as a way of easing such conflicted situations. Such a choice proved highly successful (Rauterberg & Talley (2017)). The combination of a strong set of remedies and the possibility of a corporate opportunities waiver that is found in Delaware corporate law allows for tailored solutions. Corporate opportunities protection can be waived if unattractive to investors (ie especially in the launching phase). Such protection can eventually be re-introduced when the business is mature, if consistent with the corporation’s objectives and as it would be in the case of long-termism and sustainability.
The inadequacy of most European corporate laws’ remedial system (perhaps with the exception of Germany and Spain) and the impossibility to waive such a rule seems to be an unlucky combination in the present situation. Weak remedies seem to be inconsistent with a full protection of the proprietary boundaries of the corporation and therefore at odds with long-termism. The impossibility to waive such a rule seems to concur to stifle venture capital investment and therefore technological innovation (as argued in my forthcoming book ‘Corporate Opportunities: a Law and Economic Analysis’). We should wish that European corporate opportunities rules target at least one of the two abovementioned objectives (innovation, and especially environmental innovation, or long-termism), in the hope that it produces positive ripple effects on the other.
Marco Corradi is an assistant professor of law at the ESSEC Business School, Paris and Singapore.
This post is part of the new OBLB series: ‘European Commission Initiative on Directors' Duties and Sustainable Corporate Governance’.
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