Corporate opportunity
Category: Corporate Governance
A corporate opportunity issue arises when a member of Council pursues some investment opportunity in which the bank may also have an interest. Obviously, a member should not bid against the bank in order to obtain business or property, at least not without obtaining the prior consent of the Council; even then, there would be serious questions as to whether the member had used corporate information to gain an unfair advantage.
More difficult questions arise when a member wishes to invest in something that the bank would be likely to pursue for itself if aware of the opportunity.
Example:
This is example illustrates a bad practice of the duty of loyalty by the Supervisory Council members:
IEQ PLC is suing its former directors and one adviser (IEQ PLC, formerly Intermediate Equity PLC, provides ‘specialty finance’; short term finance or equity bridging to commodity based ventures )
IEQ’s claim seeks to recover more than £3 million, in respect of questionable loans and bogus investments authorised by the former directors. IEQ says the former directors breached their fiduciary obligations as directors in two respects. First, the former directors should have given proper consideration to the monies advanced and investments made, having regard for the rights of IEQ’s shareholders, the expectation of a reasonable return, and likelihood for success.
In making these investments, some of the former directors failed to disclose their personal involvement or interests in the recipients of IEQ’s money. The investments were improper because these former directors thereby intentionally placed themselves in a position whereby they had a conflict of interest or, at the very least, a potential conflict of interest. This made it difficult for them to make future decisions on strategic investment choices, as a director, free of their own personal interests.
Adding to the conflict is the fact the director’s own shares (in some cases) were obtained at a discount from the amount paid by IEQ. This brings into play a profit motive, accentuating the former director’s personal interests and places too much strain upon the loyalties of the director.
The size of the investments being made by the former directors represented a considerable undertaking for IEQ, when compared to the available funds. IEQ’s weak financial condition made it all the more important that its directors should have no conflicting personal interest in any dealings on behalf of the corporation.
The relationship between government (bank supervision) and banks is different compared with commercial companies. Central Bank can determine the types of services that banks may offer; bank supervision have authority to examine the operations of banks; Central Bank requires disclosures by banks that are not required from other companies; Central Bank constrain decisions of banks on their capital structure; Central Bank exercise a great deal of authority over the operation of troubled banks etc.