A fiduciary duty is the loyalty between two parties, typically between a director or officer and his or her corporation. A fiduciary is anyone who is bounded by this ethical obligation. The corporate opportunity doctrine is one application of the duty of loyalty. It says that directors, officers, and controlling shareholders of a corporation must not seize for themselves a business opportunity that could benefit the corporation. Because there may be many exceptions, every incident must be examined case by case. Given that it is common for an entrepreneur to be involved in several businesses at one time–often in the same industry–consider this information before deciding to pursue a business opportunity.
Reporting the Opportunity
An officer, director, or controlling shareholder has a fiduciary duty to give a comprehensive report to the corporation of an advantageous opportunity. The corporation has the first right to the opportunity. If the corporation is fully informed of the opportunity and decides not to pursue it, then the fiduciary is permitted to pursue the opportunity individually. If the corporation is not informed, the fiduciary may be personally liable for the lost benefit to the corporation.
What is a Corporate Opportunity?
Defining a corporate opportunity takes into consideration many factors. The court must decide if the opportunity is in the corporation’s line of business and if the corporation is capable of taking advantage of this opportunity. The business opportunity does not have to be in the company’s direct line of business; it can be a logical extension of the company. For example if a vendor sells oranges and has the financial stability to expand its business to selling other fruits, a fiduciary that purchases an apple company may be found liable.
The court must weigh in on the likelihood that the corporation would have taken advantage of this opportunity—a factor usually dependent upon how valuable the opportunity is as well as the corporation’s state of affairs at the time the opportunity arose. The court must also consider if competition has been created between the director and the corporation. The director or officer may have created a conflict of interest and thus would be unable to ethically perform his or her fiduciary duty. It is also important to note that even if the business venture fails, the fiduciary can still be found liable for working against the company.
If the opportunity is deemed feasible for the corporation, the court rules against the director or officer. Then a trust in favor of the corporation will be imposed on the property, interests, and profits acquired by the director through the opportunity.
As a fiduciary, it is safest to give a full and open disclosure of the opportunity and allow the company to make its own decision. Abstain from voting on the opportunity and indicate in writing that if the corporation does not take advantage of the opportunity, the fiduciary will. As head of a corporation, you should clearly express all expectations to a fiduciary to avoid future misunderstandings and/or the expenses of litigation over such opportunities.
Contact me for more information regarding the potential issues involved in pursuing business opportunities outside of your corporation.