Whether you are a director of a corporation or a shareholder in a corporation, it is important to know the duties owed to the corporation by directors. The two main categories of duties owed by directors to the corporation are the duty of care and duty of loyalty. The duty of care refers to the fact that every director is required to be duly diligent in his decision making from his position. Meanwhile, the duty of loyalty refers to the fact that a director must place the best interests of the corporation before his own. This post deals with corporate opportunities, a very common area whereby the duty of loyalty is brought into question.
Corporate opportunities refer to the situations whereby a director or officer may attempt to usurp opportunities generally reserved to the corporation. They are most common in three areas: when corporate assets are used to discovery the opportunity; the opportunity is closely related to the corporation’s business; and when the non competition principle is brought into question. If a director discovers a corporate opportunity while in the process of using corporate assets, a court will be more likely to rule that the director has usurped the opportunity that should have been reserved to the corporation. Additionally, if a director comes across an opportunity that is closely related to the corporation’s business, a court will be more likely to rule that the director should have reserved the opportunity to the corporation. Finally, a director, pursuant to the non competition principle, cannot engage in direct or indirect competition with his corporation.
If it is determined a corporate opportunity has been taken by a director or officer, courts will then attempt to determine whether or not the director or officer took the corporate opportunity and whether or not the director or officer has a defense. Courts will use different tests to determine whether or not a corporate opportunity has taken place. One such test is whether or not there is a corporate expectancy for the opportunity and whether or not it is within the corporation’s line of business. Another possible test is whether or not the corporation had previously rejected the opportunity. Finally, the court may look to how much disclosure the director provided to the corporation.
Corporate opportunities are a tricky matter for directors of corporations. Because of the duty of loyalty, the director must always place the needs of the corporation ahead of his own, and corporate opportunities are a means where the director may violate the duty. Therefore, a director must recognize what corporate opportunities are and how to not usurp them for himself. Shareholders are owed such a duty. Sometimes directors have usurped corporate opportunities without previously realizing it. Consulting with an experience business legal team can help determine whether or not corporate opportunities have become a problematic area for your corporation. Call the Trembly Law Firm at (305) 431-5678 today to schedule a consultation.