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Borer Decision and Potential Impacts to ANCs

April 6, 2022

Overview

On April 1, 2022, the Alaska Supreme Court issued Borer v. The Eyak Corporation, which may impact Alaska Native Corporation boards of directors and their corporate governance structures and policies. Courts only resolve disputes between parties that are ripe—generally that means that the party bringing the ‎lawsuit alleges it has already been injured or restricted in some meaningful way. In Borer, a shareholder challenged a provision in The Eyak Corporation’s bylaws requiring candidates who are elected to the Board of Directors sign a confidentiality agreement and agreement to abide by the corporation’s code of conduct.  The shareholder refused to sign those agreements because, in his view, they were too broad.  The Alaska Supreme Court declined to consider the merits of the shareholder’s challenge to the substance of the confidentiality agreement and code of conduct because the shareholder’s arguments were based on hypothetical facts and not on any actual attempt to at enforcement by The Eyak Corporation. 

Borer implicitly recognized the right of Alaska Native Corporations to decline to seat directors who refuse to abide by, and sign agreements documenting their commitment to abide by, the Native Corporation’s corporate governance policies, including its code of conduct, noting that the shareholder had been notified that he would have to sign the confidentiality agreement and code of conduct before he sought election. As such, Native Corporations may want to consider adopting an explicit requirement (in their bylaws or election procedures) that, as a condition of taking their seats on the board of directors, newly elected directors execute an agreement to abide by the corporation’s corporate governance policies, including its code of conduct. Adopting such a requirement will put candidates on notice of their obligation to sign such an agreement if they are elected and, as was the case in Borer, may permit Native Corporations to decline to seat individuals who refuse to agree to comply with the corporation’s corporate governance policies, such as its code of conduct and confidentiality agreement

More broadly, the Borer decision also suggests that the Alaska Supreme Court may reject future challenges of corporate bylaws and governance policies in the abstract, without specific factual scenarios in which such governing documents are actually being applied. More detailed discussion of the Borer decision is below. 

Borer v. The Eyak Corporation Factual Background

In Borer, Lucas Borer received enough votes to be elected to the Eyak board in 2019. Eyak’s bylaws provide that “[a]ny person who is elected or selected to be a Director shall be seated as a Director only after he or she executes an acknowledgment agreeing to comply with the Corporation’s code of conduct and executes the Corporation’s confidentiality agreement.” At a board meeting following the election, Borer refused to execute the corporation’s confidentiality agreement and code of conduct, claiming they were too broad and would infringe on his rights and duties as a director. Eyak revised portions of the confidentiality agreement and code of conduct in response to Borer’s objections, but Borer refused to execute the revised confidentiality agreement and code of conduct.

Eyak ultimately did not seat Borer on its board and instead seated another eligible candidate as a director to fill the vacancy on the board. Borer then filed a complaint for declaratory and injunctive relief, asking for a court order requiring Eyak to seat him on the board. The superior court denied Borer’s motion for preliminary injunction, granted Eyak summary judgment, and awarded a portion of Eyak’s attorney’s fees against Borer. Borer appealed. 

The Alaska Supreme Court Rejected Borer’s Claims as Premature

Borer’s fundamental claim was that Eyak could not require him to execute the confidentiality agreement and code of conduct as a condition of being seated on the board because Eyak’s confidentiality agreement and code of conduct “would impermissibly burden his ability to fulfill his fiduciary duties to the corporation.” The court held that Borer’s claims were not ripe for adjudication, i.e., they had been brought too early, because “Borer asks this court to strike down a corporation’s internal governance rules even though those rules have not yet been applied to him in a concrete factual scenario.” The court concluded that because no specific attempt to enforce the terms of the confidentiality agreement and code of conduct against Borer had been brought by Eyak, “the risks of making a decision without concrete facts outweigh the harm of withholding a decision.” 

The court explained that:

Because Borer does not allege any concrete factual scenarios where the Agreements are being applied, he fails to show precisely how, and to what degree, the Agreements are in tension with a director’s fiduciary duties. Although it is certainly possible to imagine overbroad or abusive applications of these Agreements, his “pre-enforcement” challenge leaves us uncertain whether the Agreements would actually be used in those ways. Indeed, there is far greater uncertainty about how the relatively general terms of these Agreements would be applied to specific factual scenarios than there was when we concluded that a pre-enforcement challenge to laws prohibiting marijuana possession was unripe. Borer’s claims require us to decide whether Eyak’s Agreements are in irreconcilable tension with a director’s fiduciary duties. As explained in detail below, we cannot confidently answer that question without seeing how the challenged terms of these agreements are applied to real-world situations.

Although the court’s general ruling was that Borer’s claims were premature, the court made various informative comments on the fiduciary duties of directors and other corporate law matters in the course of explaining why Borer’s claims were premature. 

The Court Recognized that Directors Owe a Duty of Complete Candor to the Shareholders to Disclose All Germane or Material Information and that Enforcement of a Director’s Confidentiality Obligations Is Highly Fact-Dependent

The court first addressed Borer’s complaints about the scope of Eyak’s confidentiality agreement. Borer argued that Eyak’s confidentiality agreement was too broad and conflicted with his fiduciary duties as a director because “the expansive definition of ‘confidential information’ in the agreement would render ‘literally anything’ confidential, so that signing the agreement could prevent him from discussing even innocuous matters like ‘the outlook for the coming fiscal year’ with shareholders.”

In response to this argument, the court held that Borer’s claim was premature because the court was “not presented with a situation in which Eyak has deemed specific pieces of information confidential” such that “it is difficult to assess the justification for that label, or how treating that information as confidential affects a director’s exercise of fiduciary duties.” However, in reaching that conclusion, the court also stated that:

  • “At the outset we observe that a board of directors has a duty of ‘complete candor to its shareholders to disclose all germane or material information,’ and this duty ‘applies to matters of corporate governance as well as to corporate transactions’; and
  • “[w]hether having to keep information confidential is compatible with a director’s fiduciary duties depends not only on what information is at issue, but also the specific factual circumstances that arguably require the director to disclose this information.”

Borer therefore confirms that directors owe a “duty of candor” to shareholders in all “matters of corporate governance as well as to corporate transactions,” but that any analysis regarding a director’s confidentiality obligations, and whether the director has breached them, is “a highly fact-specific inquiry” that will involve weighing the director’s confidentiality obligations against the director’s duty of candor to the shareholders. Stated differently, the court has indicated that enforcement of a director’s confidentiality obligations will generally be based on the specific facts at issue, rather than bright-line rules or standards. 

A Director’s Duty of Loyalty to the Corporation Prevents Them from Trying to Persuade Investors to Abandon the Corporation When the Director Disagrees with Board Action

Borer also challenged a provision in Eyak’s code of conduct that requires directors to acknowledge that the board acts “as a group and not individuals” and to not “undermine public or shareholder confidence in the Board or the Corporation.” Borer argued that the requirement unlawfully prohibited directors from publicly expressing dissent to shareholders.

The court again declined to address the substance of Borer’s claim because it was premature. The court concluded that “[w]ithout concrete facts, it is difficult to assess the degree of tension between the somewhat vague rule that a director may not ‘undermine public or shareholder confidence’ in the board or corporation and the scope of a director’s fiduciary duties when the director disagrees with the action being taken.”

In explaining its reasoning, the court noted that “there is ample room for a director to register dissent from corporate action without undermining confidence in the board.” However, the court could “envision circumstances in which enforcing this provision might be justified,” including “acting on one’s disagreement with a particular corporate action by trying to persuade investors to abandon the corporation[.]” According to the court, an attempt to convince an investor to withdraw from a proposed transaction with the corporation would “seem contrary to a directory’s duty of loyalty to the corporation.”

While the court’s statement was broad and hypothetical, Borer suggests that, once the board has taken action, there will be limits on a director’s ability to take individual action to frustrate the board’s decisions, as opposed to simply expressing that they dissented from the board’s course of conduct. 

Habitual Failure to Attend Board Meetings May Violate a Director’s Standard of Care

Eyak’s Code of Conduct provides that the corporation may withhold a director’s compensation and travel expenses for violations of their standard of care. Borer argued that withholding travel reimbursement from a director is an unlawful sanction because it would cause the sanctioned director to miss board meetings and therefore violate the director’s fiduciary duty.

The court again declined to resolve Borer’s claim because there were no “concrete facts that illustrate precisely how remote participation in a meeting of the board of directors might impair a director’s fiduciary duty.” 

In rejecting Borer’s claims as premature, however, the court noted without discussion that “habitual failure to attend board meetings may violate” a director’s duty of care. Recognition of this basic principle could be important to those Native Corporations that have codes of ethics or bylaws that impose consequences on directors who regularly miss board meetings. 

The Court Suggested that It May Limit a Director’s Right to Corporate Information in Certain Circumstances

Borer’s final claim was that Eyak’s code of conduct unlawfully permits the board to sanction directors for violations of the code of conduct and confidentiality obligations by barring a director from reviewing proprietary or confidential information of the corporation. Borer argued this sanction would violate a director’s statutorily protected right to inspect documents, citing AS 10.06.450(d), which states that directors have an “absolute right at a reasonable time to inspect and copy all books, records, and documents of every kind and to inspect the physical properties of the corporation[.]”  

Notably, the court appeared to question whether a director’s right of inspection is truly “absolute,” suggesting there could be specific factual situations in which a director’s right to inspect corporate documents can be, in fact, limited or barred, such as “where a disgruntled director announces his or her intention to violate his or her fiduciary duties to the corporation, such as using inspection rights to learn trade secrets to compete with the corporation.”

The court ultimately declined to resolve Borer’s claim, explaining that in the “[absence of] concrete facts, it is uncertain how they will be applied and whether these hypothetical applications would be unlawful.” Notably, the Court did not construe AS 10.06.450(d) to supply an “absolute” right to inspect corporate information—despite the fact that the statute uses that term.  Instead, the Court suggested that the statute may be subject to a “narrowing construction” However, in reaching that conclusion, the court notably did not adopt a view that a director’s right to inspect corporate documents was actually “absolute,” despite that would “uphold” the goals of AS 10.06.450(d) in appropriate circumstances.

The Court Recognized that Challenges to Corporate Governance Policies Should Be Brought in the Context of Specific Issues and Not to Address Hypothetical Situations

Finally, Borer recognizes that the legality and limits of a Native Corporation’s corporate governance documents should be adjudicated only in the context of specific factual issues, and not in response to hypothetical concerns or questions. The court concluded its substantive discussion of Borer’s claims by stating:

In sum, Borer’s challenges to Eyak’s corporate governance documents are not ripe for decision. Absent concrete facts, it is uncertain how they will be applied and whether these hypothetical applications would be unlawful. Borer’s position is, in effect, that any person elected to be a director of a corporation may obtain a declaratory judgment that particular corporate governance rules are invalid because they might be abused in specific factual situations that have not occurred yet and may not occur at all. The ripeness doctrine cautions against precisely this approach because deciding cases in a factual vacuum creates risks of erroneous decisions and devotes judicial resources to problems that may never materialize. We therefore decline Borer’s invitation to adjudicate these claims and affirm the superior court’s judgment for Eyak.

Borer therefore provides guidance to Native Corporations that are considering or addressing challenges to their corporate governance policies by directors or shareholders that are based on hypothetical concerns, as opposed to application of those policies to specific facts or actions. Depending on the circumstances of such a challenge and the hypothetical concern, Borer may supply a basis to reject that challenge as premature. 

The Court’s Decision Is a Reminder of the Costly Nature of Certain Corporate Governance Disputes and the Partial Relief Available under Alaska’s Partial “Loser Pays” Attorney Fee Rule

In addition to providing substantive guidance on issues of corporate law, the Alaska Supreme Court also upheld the superior court’s decision to require Borer to pay a portion of Eyak’s attorney’s fees as the prevailing party. Specifically, the supreme court upheld the superior court’s decision to apply Alaska Civil Rule 82(b)(2), awarding the prevailing party in a case resolved without trial 20% of its actual attorney’s fees that were necessarily incurred. Here, 20% of Eyak’s attorney’s fees amounted to $17,780.

Borer made various arguments as to why this attorney fee order should be vacated, including an argument that forcing him to pay $17,780 in Eyak’s fees would “deter similarly situated litigants from bringing meritorious claims against a corporation.” The supreme court dispensed with this argument and refused to accept Borer’s claim that the fact he “lack[ed] [the] funds” to hire counsel for his appeal as evidence that this adverse attorney fee award would cause him financial hardship. 

Conclusion

            While the court ultimately decided that Borer’s claims were not ripe, and thus did not substantively address them, Borer discusses the fiduciary duties of directors and the right of Native Corporations to take steps to insure that their directors comply with their fiduciary obligations and with the Native Corporation’s bylaws and corporate governance policies.

This article summarizes aspects of the law and does not constitute legal advice. For legal advice for your situation, you should contact an attorney.

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