Corporate Opportunity Primer

corporate doctrine primerIntroduction

The Corporate Opportunity Doctrine also referred to as the Business Opportunity Doctrine (“Doctrine”) is an equitable principal employed by Illinois Courts, which provides that:

(a) A corporate fiduciary (e.g. Director or Officer) acting in his or her official capacity;

(b) May not develop an opportunity using corporate resources or acquire an interest adverse to that of the Corporation or acquire property that is:

    (i) reasonably incident to the present or prospective business of the Corporation; or

    (ii) in which the Corporation has:

      (A) a present interest or tangible expectancy interest; or (B) is essential to the Corporation’s existence;

(c) Unless that opportunity is first presented to the Corporation and the corporation chooses not to pursue that opportunity.

The hallmark of the Doctrine is the use of the Corporation’s assets to benefit the subject Officer or director. For example, the Doctrine would not allow a Director or Officer to profit personally by acquiring property they have reason to know that the Corporation will need or intends to acquire to perform the purpose(s) for which the Corporation was formed.

The Doctrine arises from the duty of “undivided loyalty:” a fiduciary must act in a manner that he or she reasonably believes to be in the best interests of the Corporation. More specifically, Directors and Officers have a duty to “deal openly and honestly” and to “exercise the utmost good faith and honesty in all dealings and transactions.” Levy v. Markal Sales Corp., 268 Ill. App. 3d 355, 364, 205 Ill. Dec. 599, 643 N.E.2d 1206 (1994).

ElementsA. Basic Elements

While the Doctrine is not codified in a Statute, the recognized elements of the Doctrine are:

    (a) The opportunity at issue is of practical advantage to the corporation of which the Defendant is an officer or director (e.g. “reasonably incident to the present or prospective business of the Corporation”);

    (b) The opportunity fits into the business of the corporation or into an established corporate policy which the acquisition of the opportunity would forward (e.g. “an interest or tangible expectancy”);

    (c) The corporation has an interest, actual or in expectancy, in the subject property (e.g. “an interest or tangible expectancy”), or the purchase or acquisition of the property by the officer or director may hinder or defeat the plans and purposes of the corporation in the carrying on and developing the legitimate business for which it was created (e.g. “essential to its existence”); and, <u>as set forth most recently in case law,

    (d) The Defendant officer or director has not presented the opportunity to the corporation for its consideration, or has done so, the Corporation has chosen to pursue the opportunity and the Defendant officer or director pursues that opportunity regardless.
B. When does a “corporate opportunity” exist?

The following factors are considered and weighed in determining the existence of a corporate opportunity:

    (1) Whether the business opportunity presented is one in which the complaining corporation has an interest or an expectancy growing out of an existing contractual right;

    (2) The relationship of the opportunity to the corporation's business purposes and current activities -- whether essential, necessary, or merely desirable to its reasonable needs and aspirations;

    (3) Whether, within or without the Corporation's powers, the opportunity embraces areas adaptable to the Corporation's business and into which the Corporation might easily, naturally or logically expand;

    (4) The nature of the opportunity -- whether prospectively harmful or unfair;

    (5) Whether the Corporation has the financial ability to acquire the opportunity; and

    (6) Whether the opportunity includes activities as to which the corporation has fundamental knowledge, practical experience, facilities, equipment, personnel, and the ability to pursue.

    Finally, note that the burden of proving the existence of a corporate opportunity rests upon the party challenging the conduct of the corporate fiduciary. Regal-Beloit Corp. v. Drecoll, 955 F. Supp. 849 (N.D. Ill., Aug. 6, 1996) (NO. 96 C 3694), citing Wisconsin case, Racine v. Weisflog, 165 Wis. 2d 184, 477 N.W.2d 326, 329 (Wis. Ct. App. 1991).

C. When is an opportunity “reasonably incident” to the business of the Corporation?

To determine whether an opportunity is “reasonably incident to the present or prospective business of a company,” Courts consider whether, with respect to that opportunity, the Corporation:

  • Already has interest in that area; or
  • Could, without extraordinary effort, acquire such an interest.

Courts will then consider:

  • whether the acquisition of that opportunity by the Officer or Director would hinder or defeat the plans or purposes of the Corporation in carrying on or developing its main line of business (the business for which it was created).
Dremco, Inc. v. South Chapel Hill Gardens, Inc., 274 Ill. App. 3d 534, 537, 211 Ill. Dec. 39, 654 N.E.2d 501 (1995). D. Use of Corporate resources to develop opportunity.

In Graham v. Mimms, 111 Ill. App. 3d 751, 761, 67 Ill. Dec. 313, 444 N.E.2d 549 (1982), the seminal case on the issue, the Court affirmed that “the ‘core principle’ of the corporate opportunity doctrine is that a corporation's fiduciary will not be permitted to usurp a business opportunity which was developed through the use of corporate assets.” Thus, when corporate assets are used to develop an opportunity, “the fiduciary is estopped from denying that the resulting opportunity belongs to the corporation whose assets were misappropriated, even if it was not feasible for the corporation to pursue the opportunity or it had no expectancy in the project.” Graham, 111 Ill. App. 3d at 763. Notably, in Preferred Meal Systems, Inc. v. Guse, 557 N.E.2d 506 (Ill. App. 1 Dist. 1990), the Court held that a Corporate officer was liable for a breach of fiduciary duty where, while still employed by company, the officer failed to inform his employer that other employees were forming rival company or engaging in other fiduciary breaches, solicited fellow employees to join rival business, solicited business from the employer's customers, and used company facilities and equipment to assist in developing new business or appropriating facilities or equipment for that purpose.

This factor, however, has been curtailed in more recent interpretations of the Doctrine based on a theory of implied waiver based on the disclosure of a corporate opportunity by the subject fiduciary prior to his or her taking action.

E. What constitutes sufficient “ disclosure” to the Corporation?

The most prevalent case regarding disclosure of so- called “corporate opportunities” is Dremco, Inc. v. South Chapel Hill Gardens, Inc., supra. Dremco enunciates the core principle that a fiduciary may not usurp an opportunity developed through the use of corporate assets, unless that fiduciary first discloses and tenders the opportunity to the corporation, notwithstanding the fact that the fiduciary may have believed that the corporation was legally or financially incapable of taking advantage of the opportunity. Id. at 542; SEE ALSO Graham v. Mimms, supra; Levy v. Markal Sales Corp., supra.

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).

F. Corporate employee or fiduciary: forming a rival business.

While a corporate employee may go so far as to form a rival enterprise and outfit it for business while still employed, that employee breaches his fiduciary duty to this employer when he commences business as a rival concern while still employed. However, while general corporate employees do not breach their fiduciary duties to the Corporation by planning and outfitting competing business while still employed, Directors and Officers stand on a different footing and may not do so if that activity would hinder the Corporation's business. E.J. McKernan Co. v. Gregory, 623 N.E.2d 981 (Ill. App. 2 Dist. 1993). However, it has been held that an Officer may compete with his former employer (absent a non- compete agreement) upon leaving. Veco Corp. v. Babcock, 611 N.E.2d 1054 (Ill. App. 1 Dist. 1993) (competing with former employer not inconsistent with fiduciary duty).

Conclusion

The basic tenet of the Corporate Opportunity Doctrine is that Directors and Officers cannot compete with the Corporation to which they owe a duty of loyalty. While the original conception of the Doctrine appeared to restrict fiduciaries from taking any opportunities that the Corporation could have pursued, more recent decisions have provided that disclosure to the Corporation and the Corporation’s subsequent decision to decline an opportunity relieves the fiduciary of further obligation. However, failure to disclose and tender the opportunity will result in the fiduciary being estopped from exploiting that opportunity on their own behalf.

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