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The Corporate Opportunity Doctrine

Let’s face it. Things are tough economically. Most talking heads agree the economy is undergoing a structural change that will affect everybody. Sadly it looks like not everyone is sharing the pain of the Great Recession, however. The rich are getting richer, while the rest of the population keeps on

sliding,

At a time like this who wouldn’t want to get everything they can? What if you were part of a company that wasn’t doing well and decided to make the best of it by jumping on opportunities unearthed by the company?

This is where the Corporate Opportunity or “Business Opportunity” Doctrine comes in. This equitable principal is employed by Illinois Courts and holds that:

a company fiduciary such as a director, officer. or majority shareholder may not develop an opportunity using company resources, or acquire an interest adverse to the company, or acquire property related to current or future company business, until they present that opportunity to the company and allow it to choose or decline the opportunity.

The hallmark of the Doctrine is the use of company assets to benefit the fiduciary. For instance, if a Director or Officer profited personally by acquiring property they have reason to know the company will need or intends to acquire, the Doctrine is violated. In other words, fiduciaries should not step in to grab things that the company could use.

The Doctrine itself is derived from the duty of undivided loyalty that comes with being a fiduciary. So while it goes without saying a fiduciary must act in the best interests of the company; Directors and Officers must do more: they must deal openly and honestly and exercise the utmost good faith. Levy v. Markal Sales Corp., 268 Ill. App. 3d 355, 364, 205 Ill. Dec. 599, 643 N.E.2d 1206 (1994).

While not codified by statute, the recognized elements of the Doctrine are:

a) The opportunity could benefit the company or benefit its future business;
b) The opportunity fits into the business model established by the company;
c) The company has an actual or in expectancy interest in the opportunity; and
d) The fiduciary has not presented the opportunity to the company yet; or
e) The fiduciary presented it, company chose it, but the fiduciary took it.

Using this analysis the Illinois Appellate Court pronounced in Graham v. Mimms, 111 Ill. App. 3d 751, 761, 67 Ill. Dec. 313, 444 N.E.2d 549 (1982) that the core principle of the Doctrine is that a fiduciary may not usurp a business opportunity developed through the use of corporate assets.

If corporate assets are used to develop an opportunity, the fiduciary cannot deny that the resulting benefit belongs to the company – even if the company couldn’t have pursued the opportunity itself or had no expectation interest. In Preferred Meal Systems v. Guse, 557 N.E.2d 506 (Ill. App. 1 Dist. 1990), the Court held that an officer was liable for breach of his fiduciary duty because, while still employed by the company, he failed to inform his employer that other employees were forming a rival company and soliciting customers and fellow employees to join that rival business.

The touchstone case regarding disclosure of corporate opportunities is Dremco v. South Chapel Hill Gardens, in which the Court enunciated the core principle that a fiduciary may not usurp an opportunity developed through the use of the company assets unless he first discloses and tenders the opportunity to the company – even if he believed that the company would not have been able to take advantage of the opportunity anyway. SEE ALSO Graham v. Mimms; Levy v. Markal.

Factors considered in this context include:

a) The manner in which the offer was communicated to the Corporation;
b) The good faith of the disclosing fiduciary;
c) The use of corporate assets to acquire the opportunity;
d) The degree of disclosure made to the Corporation;
e) Action taken by the Corporation with reference to that opportunity; and
f) The need or interest of the Corporation in the opportunity.

Lindenhurst Drugs, Inc. v. Becker, 154 Ill. App. 3d 61, 68, 506 N.E.2d 645, 650, 106 Ill. Dec. 845, 850 (Ill. App. 2 Dist. 1987).

So the basic tenet of the Corporate Opportunity Doctrine is that fiduciaries cannot compete with the company because they owe duties of loyalty, good faith, transparency, and fair dealing. The original conception of the Doctrine restricted fiduciaries from taking any opportunity that the company could have pursued: but more recent decisions have held that disclosure to the company and its decision not to pursue the opportunity relieves the fiduciary of further obligation. Still,  failure to disclose and tender the opportunity results in the fiduciary being prevented from exploiting the opportunity at all.

If you believe that you have experienced a violation of the Corporate Opportunity Doctrine, or that fiduciaries at your company may be violating their obligations, contact us in confidence to find out what you can do about it.

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