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The Corporate Opportunity Doctrine

Under the corporate opportunity doctrine officers and directors breach their fiduciary duties by usurping opportunities or competing with the corporation.

corporate opportunity doctrine

Corporate Opportunity Doctrine

Because of the director's fiduciary duty, he is not permitted to make any undisclosed profit in connection with the corporation's transactions, to compete unfairly with the corporation, or to take profitable business opportunities that belong to the corporation.  The loyalty requirement finds a usurpation of the corporation's interests if there is a conflict between the officer's or director's duty to the corporation and his own personal self-interest.  A breach of this duty of loyalty occurs if the director makes a decision that is not for the sole benefit of the corporation and the decision instead benefits the officer or director.  Texas courts apply the corporate opportunity doctrine when the corporation has a legitimate interest or expectancy in, and the financial resources available to take advantage of, a particular business opportunity.  

“Where a business opportunity is in the line of the corporation's activities, and is one in which the corporation has a legitimate interest or expectancy, the opportunity belongs to the corporation.” Officers and directors have no more right to divert corporate opportunities and make them their own than they have to appropriate corporate property.  A corporate officer or director who diverts a corporate opportunity commits a breach of fiduciary duty. A corporate fiduciary who diverts profits from the corporation in violation of his fiduciary relationship is personally liable for all of those profits, even when the profits are acquired by a third party.

Corporate Opportunity Doctrine Requires Disclosure

The corporate opportunity doctrine requires full disclosure, and it is immaterial that the jury finds that the plaintiff would not have taken advantage of the corporate opportunity. It is only material whether the opportunity is within the scope of a corporation’s business. The corporate opportunity doctrine would appear to be unaffected by the the interested director rule in BOC § 21.418. If a director stands to profit from a contract with a third party that is contingent upon a contract between that party and the corporation, the director may be forced to give up his or her profits to the corporation unless that director is able to show that the action was fair and beneficial to the interests of the corporation.

Corporate Opportunity Doctrine Requires Fairness

Various factors are considered in deciding whether a director has violated his duty, but the basic test is one of fairness. A number of principles are generally applied to decide whether the transaction was fair, including whether (1) the director was guilty of overreaching; (2) the corporation received full value; and (3) the contract was entered into primarily for the benefit of the corporation and not primarily for the benefit of the director. The director must disclose to the corporation the possibility of a conflict between his actions and the corporation’s interests, and the details surrounding the directors officer’s interests must also be disclosed.  

Any self-interested transaction involving a corporate fiduciary is presumed to be unfair to the corporation and a breach of fiduciary duty. The corporate fiduciary has the burden of proving the fairness to the corporation of all self-interested transactions. An undisclosed transaction that is detrimental to the corporation can only be ratified by unanimous vote of all of the shareholders after full disclosure.

Exceptions to the Corporate Opportunity Doctrine

An exception to the corporate opportunity doctrine is when the corporation is unable to take advantage of the opportunity. The burden of pleading and proving corporate inability to take advantage of the opportunity or other defense is placed on the officer or director who misappropriated the opportunity. Furthermore, it is immaterial whether the corporation or its shareholders would actually have taken advantage of the opportunity at the time.  The fiduciary duty is "prompt and complete disclosure" of the opportunity at the time it arose. Where a corporate fiduciary breaches the duty of "total disclosure" of the opportunity at the time it arises, then the law does not permit an after-the-fact determination as to whether the corporation would have taken advantage of the opportunity had it been disclosed.

The Opportunity Must Belong to the Corporation

A corporation may relinquish a business opportunity to a director after full disclosure and the assent of a majority of disinterested directors. Directors or officers of a corporation are not precluded from entering into an independent business provided they act in good faith.

Cause of Action Under the Corporate Opportunity Doctrine Belongs to the Corporation

The cause of action for misappropriation of a corporate opportunity belongs to the corporation. Nevertheless, the action is usually asserted derivatively by the stockholders on behalf of the corporation. If a cause of action is established, a court may impose a constructive trust on the usurped opportunity for the benefit of the corporation.

Competing Businesses

A director or officer may operate an independent business that competes with one in which she is already a director if it is done in good faith and without injury to the first corporation.The standards set for determining whether a director is guilty of transacting with a competing business are similar to those established for determining whether a director is "interested" when alleging charges of self-dealing. The court must determine whether a director transacts business in his director's capacity with a second corporation of which she is also a director and significantly financially associated. In such a case, a director is deemed guilty of transacting business with a competing business as she is in fact an "interested director." However, a director of one business corporation may also sit on the board of directors of a competing corporation and may in fact vote on
transactions between such corporations without violating a fiduciary duty to either. Such a director is referred to as an "interlocking director."  

After a director leaves the corporation, she generally has no further obligations toward the corporation that she has left. The director may thus freely compete with it. The director may not, however, appropriate trade secrets or intentionally interfere with contractual relationships between the prior corporation and its customers.

Houston Business Lawyer Eric Fryar About the author: Houston Business Lawyer Eric Fryar is a published author and recognized expert in the field of shareholder oppression and the rights of small business owners. Eric has devoted his practice almost exclusively to the protection of shareholder rights over the last 25 years. Learn more

 

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This post represents our opinion regarding the relevant shareholder oppression and minority ownership rights law. However, not everyone agrees with us, and the law is changing quickly in this area. This page may not be up to date. Be sure to consult with qualified counsel before relying on any information of this page. See Terms and Conditions.

 

 

 

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