What is a corporate opportunity and how does it affect me as an officer or director of my company?

A corporate opportunity is one of many fiduciary duties assumed by a corporate director officer.  That officer must place the interests of the corporation before his or her own interests when the situation calls for it. “If there is presented to a corporate officer or director a business opportunity which the corporation is financially able to undertake, is, from its nature, in the line of the corporation’s business and is of practical advantage to it, ii one in which the corporation has an interest or a reasonable expectance, and by embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of the corporation, the law will not permit him to seize the opportunity for himself.” Guth v. Loft, Inc., 5 A.2d 503 (Del. 1939).

 

Example: John is on the board of directors of a telecommunications company, Zerivon, which is a digital communications company whose main business is cellphones and digital communications.  John is approached by an old friend, Jane, who is shutting down her business that competes with Zerivon, and is selling one of the cellular licenses required by the government to do business in the cellular industry.  Jane does not offer John this license because he is on the board at Zerivon, but because of his background and experience in the industry.  John knows that Zerivon is not capable financially of purchasing and exploiting the license.  What should John do? He has the financial capacity and ability to buy and use the license, but if not planned correctly, John’s actions of buying and using the license could be seen as a breach of his fiduciary duties towards Zerivon.  John’s use of the license could not only be in competition with Zerivon, but could potentially have negative impacts on Zerivon’s business.

 

John can play it safe and present the opportunity to the Zerivon board and let them come to the same conclusion that he did, that they are not financially capable of buying the license.  This creates a safe harbor for John as a director of Zerivon, which will remove any doubt that his actions weren’t first in the best interests of Zerivon.  But this path is not required in most jurisdictions (but it is the safest path).  If in his analysis of the opportunity, the director determines that the opportunity does not belong to the corporation, and honestly believes that the corporation is not entitled to the opportunity, the director can act without presenting the opportunity to the rest of the board.

 

“The right of a director or officer to engage in business affairs outside of his or her fiduciary capacity would be illusory if these individuals were required to consider every potential, future occurrence in determining whether a particular business strategy would implicate fiduciary duty concerns…” Broz v. Cellular Information Systems, Inc., 673 A2.d 148 (Del. 1996).

 

Directors (a long with members and managers of smaller businesses and LLCs) should contact their local counsel to determine what options they have and the best way to proceed with corporate opportunities.

 

Photo By: Moyan Brenn