First Majestic Silver Corp. V. Davila: A Significant Price To Pay For A Breach Of Fiduciary Duty

Directors, officers and their advisors should take note of the recent decision in First Majestic Silver Corp. v. Davila, 2013 BCSC 717, as it is a stark reminder of the scope of liability to which fiduciaries may be exposed for a breach of their fiduciary duties.

US$89.6 Million Judgment

At issue in this case was whether Hector Davila Santos ("Davila") had breached his fiduciary duty to First Silver Reserve Inc. ("First Silver"), a subsidiary of Canadian mining company First Majestic Silver Corp. ("First Majestic"), by having his wholly-owned company pursue a corporate opportunity to purchase the Bolanos mining property in Mexico ("Bolanos"). The court held that the opportunity to purchase Bolanos was that of First Silver's and that, as First Silver's former president, chief executive officer and director, Davila breached his fiduciary duty to First Silver by purchasing Bolanos. The decision is notable, not for any particularly unique legal propositions for which it stands, but rather for illustrating the potential scope of fiduciary liability - as evidenced by the US$89.6 million judgment levelled against Davila and his co-defendant.

Background

Davila's interest in Bolanos dated back to 1965 when he acquired his first claims in the area. The company through which he held such claims eventually declared bankruptcy and Bolanos was subsequently acquired by Grupo Mexico ("Grupo") in 1993. A decade later, Grupo expressed an interest in selling Bolanos and Davila, on behalf of both First Silver and Minera El Pilon, S.A. de C.V. ("El Pilon"), a wholly-owned Mexican subsidiary of First Silver founded by Davila and for which he acted as a director, offered to purchase Bolanos for US$16 million.

Contemporaneously with his negotiations on behalf of El Pilon and First Silver for the purchase of Bolanos, and before the due diligence process with respect to such purchase was finalized, Davila sold his controlling interest in First Silver to First Majestic. A share purchase agreement was signed on April 3, 2006 and the purchase closed on May 30, 2006. Davila asserted at trial that, during the sales process, First Majestic (on its own behalf and on behalf of First Silver) rejected the opportunity to purchase Bolanos. The day after entering into the agreement with First Majestic for the sale of his First Silver shares, Davila wrote to Grupo, purportedly on behalf of El Pilon and First Silver, revoking all prior negotiations for the purchase of Bolanos...