Usurping (stealing) Corporate Opportunities in Business
The corporate opportunity doctrine precludes officers and directors of a corporation from personally benefiting from opportunities that belong to the corporation. This doctrine applies to partnerships, LLC’s and other business entities¹. It arises out of a director, officer, partner or member’s duty of loyalty to the business, and operates to prevent conflicts of interest and self-dealing.
What is a Corporate or Business Opportunity?
Generally, a corporate opportunity is any opportunity for the company to make a profit in their line of work. A corporate opportunity exists when a certain activity is reasonably related to the corporation’s present or prospective business and is one in which the corporation has the ability to do. Determining whether a corporate opportunity exists is primarily a factual inquiry. Several factors should be taken into consideration including: (1) to what extend the opportunity is within the corporation’s line of business, (2) how the opportunity came to the attention of the officer or director, (3) could the corporation benefit from the opportunity or are they legally barred or financially incapable of pursuing it, and (4) should the corporation fairly expect to receive the opportunity under the specific circumstances.
Usurping of a Corporate Opportunity
Officers, directors, and other individuals who owe a fiduciary duty to a corporation or business cannot “usurp” a corporate opportunity. In other words, if an officer or director of a corporation is presented with a business opportunity that is in the same or a related business as the one in which the corporation is involved, they cannot simply pursue that opportunity for their own personal benefit. Rather, officers and directors have a duty to first offer the business opportunity to the corporation. Personally pursuing such an opportunity without first offering it to the corporation violates an officer or director’s duty of a loyalty to the corporation, and presents the corporation with a cause of action against the breaching party.
Here is an example. What if 3 individuals owned (1/3, 1/3, 1/3) a retail outlet that sells women’s clothes. They buy their clothing from various distributors. Then, one of the owners starts selling women’s swim wear as a side business and kept all the profits to herself. Now if the retail outlet sold women’s swim wear, the violation is obvious. But, what if the store did not sell women’s swim wear? Would the owner selling on the side be liable? If swim wear is a logical extension of their clothing line, then yes she likely would be liable.
Remedies for Usurpation of Corporate Opportunity
There are various legal and equitable remedies available where a corporate opportunity has been usurped including:
- Constructive Trust. Constructive trusts are imposed to prevent unjust enrich. If an officer of a corporation improperly usurps a corporate opportunity, a Court may order that a constructive trust be imposed on the officer’s profits, effectively transferring all profits from the usurped opportunity to the corporation.
- Actual Damages. A corporation can obtain actual damages against one who usurps a corporate opportunity. Just as in a typical breach of fiduciary duty case, actual damages are measured by the amount that will compensate the corporation for all of the detriment caused by the officer or directors usurpation of the corporate opportunity.
- Punitive Damages. In egregious cases, a Court may award punitive damages against one who has usurped a corporate opportunity. Punitive damages are damages a defendant must pay in addition to actual damages, and are meant to punish the defendant and to deter similar conduct in the future.
Getting Legal Help
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¹Application to Limited Liability Companies
“ A member’s duty of loyalty to the limited liability company and the other members is limited to the following:
(1) To account to the limited liability company and hold as trustee for it any property, profit, or benefit derived by the member in the conduct and winding up of the activities of a limited liability company or derived from a use by the member of a limited liability company property, including the appropriation of a limited liability company opportunity.” (Cal Corp Code § 17704.09(b)(1))
Application to Partnerships
“A partner’s duty of loyalty to the partnership and the other partners includes all of the following:
(1) To account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property or information, including the appropriation of a partnership opportunity.” (Cal Corp Code § 16404(b)(1))
“The instructions advise the jury that a partner’s duty not to compete with his partnership with respect to a partnership opportunity which is actively being pursued by the partnership survives his withdrawal therefrom. Defendants have cited no contrary authority. Nor do defendants assert any persuasive reason in logic or principle which relieves a partner from such continuing duty. There is an obvious and essential unfairness in one partner’s attempted exploitation of a partnership opportunity for his own personal benefit and to the resulting detriment of his copartners. It may be assumed, although perhaps not always easily proven, that such competition with one’s own partnership is greatly facilitated by access to relevant information available only to partners. Moreover, it is equally obvious that a formal disassociation of oneself from a partnership does not change this situation unless the interested parties specifically agree otherwise. It is no less a violation of the trust imposed between partners to permit the personal exploitation of that partnership information and opportunity to the prejudice of one’s former associates by the simple expedient of withdrawal from the partnership.” ((Leff v. Gunter (1983) 33 Cal.3d 508, 514).
“The principle that a partner cannot derive any benefit from the partnership relationship for himself as against his copartners prevents a partner from obtaining a renewal of a partnership lease for his own purposes, to commence after the expiration of the original lease or after the termination of the partnership. The chance or opportunity of renewal of a lease held by a partnership is considered in itself a distinct asset of the partnership in which all the partners have an interest and consequently in such cases the lease so taken inures to the benefit of the firm, the partner taking it holding it as a constructive trustee.” (Ferry v. McNeil (1963) 214 Cal.App.2d 411, 415-416.)
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