Disclosure of a Corporate Opportunity
Generally, a corporate director breaches the duty of loyalty if she seizes a business opportunity for herself that the corporation was financially capable of undertaking or in which the corporation had a reasonable interest or expectancy. Additionally, the director’s loyalty is called into question if she takes personal advantage of a business opportunity that was in line with the corporation’s business. An issue that frequently arises in claims against directors for usurping a corporate opportunity is prior disclosure and/or offering of the business opportunity to the corporation and/or the shareholders.
- the circumstances in which the director first became aware of the opportunity
- the significance of the opportunity to the corporation and the degree of interest of the corporation in the opportunity
- whether the business opportunity relates to the corporation’s contemplated or existing business
- whether there is a reasonable basis for the corporation to expect that the director should make the opportunity available to the corporation
Not surprisingly, there is no uniformity as to the role disclosure plays in a corporate opportunity case. The American Law Institute’s Principles of Corporate Governance recommends that a director (or senior officer) should offer the business opportunity to the corporation and fully disclose the conflict of interest before taking advantage of the opportunity. A minority of jurisdictions follow this view. If the director fails to disclose the opportunity, the director is unequivocally liable. As stated by one court, “the corporation or association must be given the opportunity to decide, upon full disclosure of the pertinent facts, whether it wishes to enter into a business that is reasonably incident to its present or prospective operations.” The director’s belief that the corporation could not or would not engage in a business opportunity is typically insufficient. The director must “present the question to the corporation for the corporation’s independent evaluation.”
Some jurisdictions focus on the fiduciary’s affirmative defenses rather than whether the fiduciary did or did not disclose the opportunity to the corporation. An example of an affirmative defense is if the corporation was insolvent or financially unable to avail itself of the corporate opportunity.
Other courts (such as the Delaware Supreme Court) take somewhat of a hybrid approach to disclosure. Adequate disclosure can be a complete defense to a claim of usurpation of a corporate opportunity; however, nondisclosure does not constitute a per se usurpation of the corporate opportunity. Some courts take the view that “there is no per se duty to make a presentation to the corporate board prior to acceptance of an opportunity if the corporation does not have the interest, financial ability, or expectancy to pursue the opportunity. ” The Supreme Court of Connecticut takes the view that failure to disclose does not automatically result in a finding of breach. The fiduciary is allowed to prove his or her good faith by clear and convincing evidence that the corporation was not harmed.
Delaware’s corporation statute now contains a provision that empowers corporations to renounce any business interest, expectancy, or the right to be offered an opportunity to participate in designated business opportunities or categories of business opportunities. This power can only be exercised if the corporation places the renouncement provision in its certificate of incorporation or if the corporation’s board of directors formally adopts a renouncement policy.
Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.