The Corporate Opportunity Doctrine

The Corporate Opportunity Doctrine

Mazyar M. Hedayat
 | 
The moment an entrepreneur starts a business and assembles a group of colleagues, investors, and co-workers, her or she begins to share sensitive information: trade-secrets, customer data, internal information created after hours of careful research, and more.

In turn, members of the core team contribute time, money, sweat equity, and contacts. This exchange is sacred.

Without it, businesses could not get off the ground.

No wonder, then, that the law recognizes obligations between this vital group; including honesty, good-faith, best-efforts, and what is generally known as fiduciary duty.

What is Fiduciary Duty?
The easiest way to think about fiduciary duty is this: it is what a parent owes their child, a doctor owes their patient, or a lawyer owes their client.

It is the obligation that comes with being in a superior position.

How often does that happen?
Every day, as it turns out. Every officer and director of a company, as well as every principle in the undertaking (no matter how small) has a fiduciary duty, and he or she is a fiduciary. Moreover, fiduciary duties are not one-dimensional or limited.

On the contrary, they include
  • Fair dealing, and acting in good faith;
  • To refrain from taking an opportunity;
  • Honesty and full disclosure;
  • To refrain from mere self-dealing.

Consider, for example, the Business Opportunity Doctrine, an equitable principle employed by Courts around the country to decide if a company insider, shareholder, officer, or director has breached their fiduciary duty by taking an opportunity that should have benefited the whole company. In other words, has the fiduciary stolen something of value from the company: whether money, employees, customers, or opportunities that should belong to it?

 In its more often stated form, the Business Opportunity Doctrine provides that:

A fiduciary (e.g. Majority Shareholder, Director, or Officer) acting in his or her official capacity may not develop an opportunity using company resources, or acquire an interest adverse to the company, or acquire property that is:
  • reasonably incident to the present or prospective business of the company;
  • in which the company has: (A) a present interest or tangible expectancy interest; or (B) is essential to the company’s continued existence;
Unless the opportunity is first presented to the company and the Board declines to pursue it.

The hallmark of the Doctrine is the use of the company’s assets to benefit the fiduciary. For example, the Doctrine would not allow a Director or Officer to profit personally by acquiring property they have reason to know that the company will need or intends to acquire to perform the purpose(s) for which it was formed. Origin of the Doctrine As we can see, the Business Opportunity Doctrine arises from the idea of “undivided loyalty” embedded in fiduciary duty.

That is, a fiduciary must act in a manner that he or she reasonably believes to be in the best interests of the company. Fiduciaries have a duty to “deal openly and honestly” and to “exercise the utmost good faith and honesty in all dealings and transactions.” Levy v. Markal Sales Corp., 268 Ill. App. 3d 355, 364, 205 Ill. Dec. 599, 643 N.E.2d 1206 (1994).

This means that
  • (a) a fiduciary who is acting in their official capacity;
  • (b) may not take advantage of certain opportunities;
  • (c) unless, after full disclosure, the company passes.

In the case of Graham v. Mimms, considered the standard, the Illinois Appellate Court found that the ‘core principle’ of the Business Opportunity Doctrine was that a company fiduciary may not usurp an opportunity developed through the use of company assets, time, and employees, without first presenting the situation to the company and giving it an opportunity to pass on the opportunity through its Board of Directors.

The Court’s reasoning was that when its assets, resources, or people are used to develop or discover an opportunity, the company has the right of first refusal when it comes to that opportunity. In Preferred Meal Systems, Inc. v. Guse, the Illinois Appellate Court held that a corporate officer who failed to inform the company that other employees were forming a rival company, soliciting fellow employees to join the rival business, seeking business from their employer's customers, and using company facilities and equipment to develop leads for the new company, breached his fiduciary duty.

But what about real situations?
An experienced business lawyer should be able to guide their Client through this thicket of rules by focusing on these core questions:
  • Did the accused party have a fiduciary duty under these circumstances? 
  • Was an opportunity discovered or developed using company resources?
  • Was the company’s Board of Directors advised of the opportunity first?
  • Was that opportunity or asset part of the company’s regular business?
  • Could the company have benefited of the opportunity had been revealed?
This article is intended to convey generally useful information only and does not constitute legal advice. Any opinions expressed are solely those of the author, not LawChamps.
Mazyar M. Hedayat

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