Fiduciaries of corporations, from time to time, encounter business opportunities that may appeal to their personal interests. What happens under these circumstances? Is a director of a corporation’s board permitted to pursue the business opportunity without notifying the board? Must the opportunity be “offered” to the corporation first if it is compatible with the business of the corporation?
The corporate opportunity doctrine directly addresses this scenario. The rule, which emerges from the fiduciary duty of loyalty owed to the corporation and its shareholders, prohibits a corporate director from taking advantage of an opportunity associated with the corporate entity without first presenting the opportunity to the corporation. The principle underlying this rule is that a corporate opportunity belongs foremost to the company, and that a director’s personal stake and interest is secondary to that of the corporation.
A corporate opportunity can be generally identified as any activity or transaction that is in the same or reasonably similar field as the company’s current or future business. The corporation must be prepared to engage in the business presented by the project or transaction. The primary hurdle in applying this doctrine is understanding what a corporate opportunity specifically consists of; indeed various courts have struggled to find a comprehensive and singular definition of corporate opportunity as reflected in the range of decisions across and within jurisdictions related to the application of this doctrine. Some of the more widely used “tests” are the following:
Interest or Expectancy Test. The fundamental question to ask under this well-established analysis is whether the corporation has an interest or expectancy in this particular corporate opportunity. This test refers largely to current (rather than prospective) corporate pursuits by assessing whether the corporation has current contractual relationships or burgeoning contractual rights based on existing interests or relationships.
Line-of-Business Test. Under the line-of-business test, any transaction or project that conforms or correlates to the corporation’s line-of-business is regarded as a corporate opportunity. In applying this analysis, the courts consider any current or future opportunity that could be anticipated to be of interest to the corporation in light of the particular characteristics and nature of the corporate entity.
Fairness Test. A minority of states have applied the fairness test, which essentially inquires whether the exploitation of the corporate opportunity by a director would violate standards of fairness and equity toward the corporation. The vague and broad concept of fairness in this context has rendered application of this test difficult.
Corporate directors and fiduciaries must take care whenever business opportunities of personal interest arise or they run the risk of breaching their fiduciary duties to the corporation.
