Directors, officers, and employees of a corporation owe fiduciary duties to the corporation. One of these fiduciary duties is a duty of loyalty. Corporate fiduciaries cannot do harm to the company the serve. More particularly in the context of business opportunities, they cannot seize for themselves a business opportunity that would otherwise go to the corporation’s benefit. This duty is commonly referred to as the Corporate Opportunity Doctrine. This doctrine applies even if the opportunity was discovered while not performing duties for the corporation. If after disclosing this opportunity, the corporation declines to take advantage of it, then the fiduciary may do so.
An Example
By way of example, assume you discovered that a distressed vendor of widgets willing to sell them at a significantly reduced price. The company you work for is in the widget market and has the funds to purchase them and the customers to buy them. Instead of informing your company of this opportunity, you purchase and resell the widgets yourself, making a nice profit. Your actions usurp a corporate opportunity and breached your fiduciary to the company.
The Legal Tests
The application of the Corporate Opportunity Doctrine is not always so straightforward and does contain some safe harbors for legitimate behavior. In evaluating whether a breach has occurred, courts will apply three tests: the line of business test, the interest or expectancy test, and the fairness test. Under any test, a breach will be found if the corporate opportunity is reasonably related to the company’s current or prospective business, and the company has the ability to take advantage of that opportunity. The application of the test requires a close examination of the surrounding facts at the time the opportunity arises.
Safe Harbor
If you are in a position to take advantage of a corporate opportunity, you are not necessarily precluded from doing so. Provided you disclose the opportunity to the company first, and with full disclosure and ample opportunity they decline to take advantage of it, you may now proceed. There are some important nuances in the application of this safe harbor. For example, if you are a corporate voting member, you must abstain from voting on whether to obtain the opportunity. Also, if you are in a position of power over the decision makers, their consent may be illusory, and not supported should the shareholders discover and bring suit.
Takeaway
If you are in a corporate fiduciary position, before committing to a potentially competitive venture, it is wise to seek counsel on how your actions may incur liability. If you are a corporate entity, concerned about a fiduciary usurping an opportunity that rightly belongs to the company, we can help as well. Contact CASHMAN LAW today for a free consultation to see how we might help you wade through these sometimes murky waters.
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