Corporate opportunity doctrine

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The corporate opportunity doctrine is a legal principle, that derives from duty of loyalty, that informs that employees should not harm the corporation in any way and expects them to always act in the best interests of the corporation to the best of their abilities(Corporate Opportunity Doctrine,2019). The corporate opportunity doctrine prohibits director or an officer of a corporation from turning-away a business proposal or opportunity presented to or belonging to, himself, corporation or other affiliates. In the context of joint-venture, a member of the venture owes to the other member a fiduciary duty to not usurp beneficial opportunities that rightfully belong to the joint venture (J. Leo Johnson, Inc. v. Carmer,(1959)).

The court must analyze a few factors to decide whether something is a corporate opportunity or not. These elements include(Jennifer Ying, (2009)):

  • If the corporation would be able to accept this proposal based on the financial situation,
  • If the corporation is in the same line of business as the opportunity,
  • Whether the corporation had an expectancy or interest in opportunity,
  • Whether taking the opportunity would be a breach of fiduciary duties or it could create a conflict of interest between the directors and officers (Jennifer Ying, (2009)).

Theoretical Example of Opportunity

A very interesting example is shown by the Law Offices of Stimmel, Stimmel, and Smith and it reads as follows: "Assume you are a sales manager for Company X which sells oranges. Assume you discover that a vendor of oranges is in economic trouble and willing to sell the product for a fifty percent reduced price. The company you work for has sufficient funds to purchase the oranges and customers waiting to buy them.

You cannot purchase the oranges for your account. You cannot refer the vendor to another entity and hope to receive a commission or some other benefit. You cannot purchase the oranges and resell them to your entity for a markup.

The reduced price oranges are a corporate opportunity and if the fiduciary takes it he or she may be personally liable to the corporation for the lost benefit." (Corporate Opportunity Doctrine,(2019))

Remedies for appropriation

What are the applicable remedies for found liabilities ?

Remedies can be equitable or legal. Most corporate opportunity cases lean to be gains-based and aim for the monetary remedy. "The presumptive remedy for such a breach is the imposition of a constructive trust on the disputed enterprise, effectively disgorging all of the fiduciary’s verifiable profits"(Talley E,Hashmall M, (2001)). It is very common for courts to reserve some of the profits for the event of breaching fiduciary. When the appropriation is considered to be particularly vicious or in bad faith, punitive damages could be applied.

In the words of Eric Talley and Mira Hashmall : "In terms of Figure 1, a fiduciary might have breached by completely failing to disclose (node X1) or by disclosing but failing to secure proper rejection before pursuing the project (node X2). Regardless of this path, most courts tend to impose a constructive trust on a breaching fiduciary as a default measure of damages. The likelihood of punitive damages, however, appears to be greater for appropriation following nondisclosure than it is for appropriation following full disclosure but absent refusal by the firm" (Talley E,Hashmall M, (2001)).

Advantages of Corporate opportunity doctrine

The corporate opportunity doctrine is beneficial in many ways:

  • It provides clear guidance to corporate officers and directors regarding their fiduciary duties and responsibilities.
  • It ensures that directors and officers do not abuse their positions by taking advantage of opportunities that should belong to the corporation.
  • It protects shareholders' interests by preventing directors and officers from taking advantage of corporate opportunities for personal gain.
  • It also creates a level playing field for all shareholders by ensuring that corporate opportunities are available to all shareholders equally.
  • It encourages directors and officers to be prudent in their decision-making and to always act in the best interests of the corporation.

Limitations of Corporate opportunity doctrine

  • The corporate opportunity doctrine has several limitations. Firstly, the doctrine does not apply to opportunities that are widely and publicly available to all investors. Secondly, it does not apply to opportunities that are not related to the core business of the corporation and not in line with the corporation’s objectives. Thirdly, the doctrine does not apply to opportunities that are not financially advantageous to the corporation. Fourthly, the doctrine does not apply to opportunities that the corporation cannot practically or legally pursue. Finally, the doctrine does not apply to opportunities that are presented to the corporation but not accepted.

Other approaches related to Corporate opportunity doctrine

As the corporate opportunity doctrine is a legal principle that enforces a duty of loyalty to the corporation, there are several other approaches that are related to this doctrine. These approaches include:

  • The Duty of Care: This approach requires directors of a corporation to act with reasonable care in their corporate decision-making. This includes objectively evaluating any opportunity presented to the corporation and making an informed decision that would be in the best interest of the corporation.
  • The Duty of Loyalty: This approach requires directors to act in the best interest of the corporation and to not act in a way that may be beneficial to the director instead of the corporation. This includes not taking advantage of opportunities or business deals that rightfully belong to the corporation.
  • The Duty of Obedience: This approach requires directors to act in accordance with the company's governing documents and the laws of the jurisdiction in which the corporation is registered.

In summary, the corporate opportunity doctrine is a legal principle that enforces a duty of loyalty to the corporation. There are several other approaches related to this doctrine that require directors to act with reasonable care, loyalty and obedience in their decision-making. These approaches ensure that directors are making decisions that are in the best interests of the corporation.


Corporate opportunity doctrine — recommended articles
Fiscal Agent — Principal agent problem — Agency cost — Nominee director — Negligent misrepresentation — Selling away — Phoenix company — Statutory obligation — Universal agent

References

Author: Gabriela Zabawa

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