COMMENT

Source: 1984 Model Act § 8.70, added by amendment, proposed, 59 Bus. Law. 569 (2004), adopted, 60 Bus. Law. 943 (2005); 1984 Model Act § 1.43, added by amendment, proposed, 60 Bus. Law. 341 (2004), adopted, 60 Bus. Law. 943 (2005); Del. Code Ann. tit. § 122(17).

New Code Section14-2-870 is generally based on Model Act § 8.70 and statutes in various states that address the power of a corporation to disclaim any interest the corporation may have in certain business opportunities. Mississippi, Virginia, Wyoming, Maine, Connecticut, Iowa and the District of Columbia have adopted versions of Model Act § 8.70. See Miss. Code Ann. § 79-4-8.70 (West. 1999); Va. Code Ann. § 13.1-691.1 (West. 2007); Wyo. Stat. Ann. § 17-16-870 (West. 2007); Me. Rev. Stat. Ann. Tit. 13-C, § 881 (West. 2005); Conn. Gen. Stat. § 33-785 (West. 2005); Iowa Code Ann. § 490.870 (West. 2009); D.C. Code § 29-306.80 (West. 2001). Those statutes generally address the procedure by which the corporation may disclaim any interest in a specific business opportunity presented to a director. The legislatures of Delaware, Missouri, Oklahoma, Texas, New Jersey and Puerto Rico have also adopted statutory provisions addressing business opportunities, but have generally only confirmed the corporation's fundamental power to renounce an interest in a business opportunity, including in advance of the existence of the opportunity, without addressing procedural aspects of the renunciation in detail. See Del. Code Ann. tit. 8 § 122 (17); Mo. Ann. Stat. § 351.385 (20) (West. 2001); Okla. Stat. Ann. tit. 18, § 1016(17) (West. 1999); Tex. Business Organizations Code Ann. § 2.101(21) (West. 2008); N.J. Stat. Ann. § 14A:3-1 (West. 2003); 2009 P.R. Laws Act 164. New Code Section14-2-870 combines these approaches, covering not only the corporation's power to disclaim an interest in an opportunity, but also providing "safe harbor" procedures for approving disclaimers with respect to particular opportunities.

New Code Section 14-2-870 generally uses the Model Act's terminology, referring to a "disclaimer," rather than a "renunciation," as used in some of the statutes adopted in other states, but these terms were deemed synonymous and broadly to encompass corporate action forgoing a business opportunity whether expressly styled as a disclaimer or renunciation or in other terms (e.g., approval, authorization, waiver). This Section also follows the Model Act in referring to disclaimers of an "interest" in an opportunity. This term is intended to refer to any right or entitlement of the corporation with respect to an opportunity under any applicable test for determining that a business opportunity is one for which a director or officer could be liable for misappropriation.

Subsection (a) confirms the basic power of the corporation to disclaim, in its articles of incorporation or bylaws or by action of its shareholders or board, the corporation's interest in a specific business opportunity or in particular classes or categories of opportunities. Among other things, subsection (a) clarifies that a corporation may determine in advance whether an opportunity within a particular class or category of business opportunities is a corporate opportunity to be presented to the corporation, rather than to address such opportunities as they arise. This will allow corporations to attract, for example, directors who might be reluctant to jeopardize future business opportunities through service on the board without an advance agreement clarifying any obligation they might have to present opportunities to the corporation or to refrain from pursuing opportunities presented to them. Without an advance agreement, a corporation could have difficulty in attracting directors engaged in venture capital financing, financial advisory services or other businesses in which they receive, in the ordinary course of business, a variety of business opportunities from third parties with no relationship to the corporation. Subsection (a) is not intended to change existing law in this area, but to confirm and make explicit the corporation's power to enter into these advance agreements. Such clarification will also facilitate use of a corporation, as opposed to a limited liability company or other entity, as a business vehicle where desired. Limited liability companies and various other entities are already free to eliminate or define the duties of their members and managers with respect to business opportunities. See e.g. , O.C.G.A. §§ 14-11-305(4)(A)(limited liability company);14-9-108(b)(1) (limited partnership). Subsection (a) also confirms that the corporation has the power to determine these matters after the fact, permitting the corporation to disclaim any arguable interest it may have had in a business opportunity in which a director or officer is participating. This deviates from Model Act § 8.70(a), which would only allow a business opportunity disclaimer before a director has become obligated in connection with an opportunity. Nothing currently restricts such after the fact disclaimers, and permitting them is consistent with the authority in Code Sections14-2-862,14-2-863 and14-2-864, which permit after the fact approvals of director's conflicting interest transactions and officer's conflicting intent transactions. It was felt that a restriction on after the fact disclaimers would unnecessarily limit the discretion of the board, particularly since the need for board disclaimers might not be apparent until after the director or officer had become committed to participate in the business opportunity. After the fact board and shareholder ratification of corporate acts is commonplace, and the proposed authority to permit after the fact disclaimers in the business opportunity arena is considered comparable.

Subsection (a) is not intended to affect the level of judicial scrutiny that would apply to a board's action in disclaiming the corporation's interest in a business opportunity or in permitting a director or officer to participate in an opportunity, which will continue to be determined based on compliance with the directors' normal duties. See Code Section 14-2-830.

The classes or categories of business opportunities referred to in subsection (a) may be specified by any manner of defining or delineating business opportunities or the corporation's or any other party's entitlement thereto or interest therein, including, without limitation, by line or type of business, identity of the originator of the business opportunity, identity of the party or parties to or having an interest in the business opportunity, identity of the recipient or potential recipient of the business opportunity, periods of time or geographical location.

A number of the statutes adopted in other states expressly authorize renunciation of opportunities presented to shareholders or other persons in addition to directors and officers. Subsection (a) covers shareholders and such other persons only to the extent that the discretion or powers of the board of directors are vested in such persons pursuant to Code Sections14-2-732,14-2-920 or 14-922. The Code does not create or codify the common law corporate opportunity doctrine applicable to directors and officers or define its parameters. Nevertheless, certain Code provisions touch on issues that relate to the application of that doctrine to directors and officers, such as by limiting the corporation's power to exculpate a director for appropriating a business opportunity of the corporation in violation of his or her duties. See O.C.G.A. § 14-2-202(b)(4). See also O.C.G.A. §§ 14-2-831(a)(1)(c),14-2-856(b)(1), and14-2-857(a)(2)(A)). Under these circumstances, it is appropriate to make the clarifications intended by this new subsection (a), confirming the corporation's power to disclaim an interest in certain business opportunities, specifically or by type, in favor of directors and officers. On the other hand, a corporation would not normally have any interest in opportunities available to a shareholder in the shareholder's capacity as such, except to the extent that the discretion or powers of the board of directors are vested in the shareholder pursuant to Code Sections14-2-732 or14-2-920 or such corporation is a statutory close corporation operating without a board of directors under Code Section14-2-922. Accordingly, inclusion of shareholders in subsection (a) absent these special circumstances was deemed unnecessary and potentially misleading in that such inclusion could imply that a shareholder has a general duty to present business opportunities to the corporation. This limitation is not intended to suggest that a corporation lacks authority to disclaim in advance any interest in business opportunities available to any shareholder that the corporation may have for any reason. Corporations may have reason to renounce such interests in favor of not only shareholders, but also employees, agents, and other persons who are not directors or officers. These and related matters are frequently addressed in shareholder agreements, noncompetition agreements, and employment agreements, as well as in established principles of agency and other law. Corporations remain free to address business opportunity matters with respect to such persons, including shareholders in their capacity as such, in advance or otherwise.

Subsection (b) is derived from Section 8.70(a) of the Model Act and is a corollary to the general grant of authority in subsection (a). It confirms that an effective disclaimer under subsection (a) forecloses a claim against the director or officer based on the matters disclaimed, whether based on the Code or common law.

Subsection (c) describes a procedure available to a director who elects to subject a business opportunity, regardless of whether the opportunity would be classified as an opportunity in which the corporation has an interest, to the disclosure and approval procedures set forth therein. Subsection (c) is intended to make clear that use of the approval procedures described in Section 861 or 862 for director's conflicting interest transactions provides a safe harbor with respect to the approval process, eliminating any concern that approval of a disclaimer relating to a particular, business opportunity is ineffective due to, for example, participation in the vote on the disclaimer by a director who may participate in the opportunity. As subsection (f) makes clear, failure to follow the procedures in subsection (c) would not taint a particular disclaimer or imply that the director should have presented an opportunity to the corporation. In the case of advance disclaimers with respect to particular classes or categories of business opportunities, particularly if given when a specific opportunity may not yet exist, compliance with the disclosure concepts contemplated by subsection (c) would generally not be possible or meaningful. The efficacy and consequences of disclaimers approved outside the parameters of the safe harbor provision of subsection (c) would be governed by the rules otherwise applicable to corporate decisions, including, as noted above, any applicable duties of directors approving the disclaimer.

The safe harbor provided is as broad as that provided for a director's conflicting interest transaction in Code Section 14-2-861: if the director makes required disclosure of the facts specified and the corporation's interest in the opportunity is disclaimed by action by qualified directors under subsection (c)(1) or shareholder action under subsection (c)(2), the director has foreclosed any claim of breach of the duty of loyalty and may not be subject to equitable relief, damages or other sanctions if the director thereafter takes the opportunity for his or her own account or for the benefit of another person. As a general proposition, disclaimer by action by qualified directors under subsection (c)(1) must meet all of the requirements provided in Code Section 14-2-862 with respect to a director's conflicting interest transaction if the business opportunity were a director's conflicting interest transaction and disclaimer by shareholder action under subsection (c)(2) must likewise comply with all of the requirements for shareholder action under Code Section 14-2-863. Note, however, one important difference.

In contrast to director or shareholder action under Code Sections 14-2-862 and 14-2-863, which employ Code Section 14-2-860's definition of "required disclosure," subsection (c) instead requires the disclosure to those acting for the corporation of "all material facts concerning the business opportunity that are then known to the director." As a technical matter, Code Section 14-2-860 calls for, in part, disclosure of "the existence and nature" of the director's conflicting interest - that information is not only non-existent but irrelevant for purposes of subsection (c). But there is another consideration justifying replacement of the Code Section 14-2-860 definition. In the case of the director's conflicting interest transaction, the director proposing to enter into a transaction with the corporation has presumably completed due diligence and made an informed judgment respecting the matter; accordingly, that interested director is in a position to disclose "all facts known to the director respecting the subject matter of the transaction that a director free of such conflicting interest would reasonably believe to be material in deciding whether to proceed with the transaction." The conflicted director, placing himself or herself in the independent director's position, should be able to deal comfortably with the objective materiality standard. In contrast, the director proffering a business opportunity will often not have undertaken due diligence and made an informed judgment to pursue the opportunity following a corporate disclaimer. Thus, the disclosure obligation of subsection (c) requires only that the director reveal all material facts concerning the business opportunity that, at the time when disclosure is made, are known to the director. The safe-harbor procedure shields the director even if a material fact regarding the business opportunity is not disclosed, so long as the proffering director had no knowledge of such fact. In sum, the disclosure requirement for subsection (c) must be and should be different from that called for by the provisions of Article 8, part 6.

Subsection (d) of Code Section14-2-870, which has no counterpart in the Model Act, describes a safe harbor for officers comparable to that available to directors under subsection (c). Subsection (d) is based on Code Section14-2-864, which restored the safe harbor for conflicting interest transactions between the corporation and its officers formerly provided by O.C.G.A. § 14-2-155 (1982). Because Code Section14-2-864 specifically provides a safe harbor for officer's conflicting interest transactions, it was feared that negative implications might arise were similar protections not provided by new Code Section14-2-870 for business opportunities. The discussion of subsection (c) above applies equally to subsection (d).

Subsection (e), which has no counterpart in the Model Act, is designed to deal, in a manner similar to subsection (b) of Code Section 14-2-862, with situations in which a director or officer is not able to comply fully with the disclosure requirements of subsection (c) or (d) because of an extrinsic duty of confidentiality. Under certain circumstances, subsection (e) makes it possible for such a matter to be brought to the board or shareholders for consideration under subsection (c) or (d) and thus enable both the company and the director or officer to secure the protection afforded by subsection (c) or (d), as the case may be, for the business opportunity even though the director or officer cannot make the full disclosure usually required by those subsections. To comply with subsection (e), the director or officer must inform the directors or shareholders who vote on the disclaimer of the nature of the duty of confidentiality (e.g., inform them that it arises out of an attorney-client privilege or a duty as a director of another company that prevents him or her from making the disclosure called for by subsection (c) or (d)), and disclose all material facts concerning the business opportunity that are then known to the director to the extent such disclosure is not violative of such duty.

Subsection (f) reflects a fundamental difference between the coverage of Parts 6 and 7 of Article 8. Because Part 6 provides an exclusive definition of "director's conflicting interest transaction," any transaction meeting the definition that is not approved in accordance with the provisions of Part 6 is not entitled to its safe harbor. Unless the interested director can, upon challenge, establish the transaction's fairness, the director's conduct is presumptively actionable and subject to the full range of remedies that might otherwise be awarded by a court. In contrast, the concept of "business opportunity" under Code Section 14-2-870 is not defined, but is intended to refer generically to any business opportunity in a broad sense, with no implication that the corporation has or might have an interest therein of any type. This approach recognizes that, given the vagueness of the judicially-created corporate opportunity doctrine and related director and officer duties with respect to business opportunities, a director or officer might be inclined to seek safe-harbor protection under Code Section 14-2-870 before pursuing an opportunity that someone might argue at a later point was one that the director or officer should have presented to the corporation. By the same token, a director or officer might conclude that under applicable law the corporation has no cognizable interest in a particular business opportunity and that participation in it does not violate any duty and might choose to pursue it without seeking a disclaimer by the corporation under Code Section 14-2-870. Accordingly, subsection (f) provides that a decision not to employ the procedures of Code Section 14-2-870 neither creates any negative inference nor alters the burden of proof in any subsequent proceeding seeking damages or equitable relief based upon an alleged misappropriation of or participation in a particular business opportunity.