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Saturday, October 28, 2006 9:55:03 AM
http://www.stimmel-law.com/articles/Corporate_Opportunity_Doctrine.html
CORPORATE OPPORTUNITY DOCTRINE: THE BASICS
An employee, a director, and/or an officer of a corporation owes a fiduciary duty to the corporation, as discussed in detail in the linked article above. Part of that duty is that they cannot seize for themselves a business opportunity that would otherwise go to the corporation’s benefit. This is true whether or not the opportunity was discovered while performing duties for the particular corporation.
A typical example will best illustrate how this theory works. Assume you are a sales manager for Company X which sells oranges. Assume you discover that a vendor of oranges is in economic trouble and willing to sell the product for a fifty percent reduced price. The company you work for has sufficient funds to purchase the oranges and customers waiting to buy them.
You cannot purchase the oranges for your own account. You cannot refer the vendor to another entity and hope to receive a commission or some other benefit. You cannot purchase the oranges and resell them to your own entity for a markup.
The reduced price oranges are a corporate opportunity and if the fiduciary takes it he or she may be personally liable to the corporation for the lost benefit.
What is required to create the violation of the corporate opportunity doctrine? What happens if the company you work for is not interested in those oranges or does not have the financing to buy them? What precisely is needed to constitute a violation of the doctrine?
Under this doctrine, one who occupies a fiduciary relationship to the corporation is prohibited from acquiring, in opposition to the corporation, property or rights in which the corporation has an interest or tangible expectancy or which is essential to its interest. Kelegian v Mordichian (1995) 39 Cal. Rptr. 2d, 390; 33 Cal. App. 4th, 982.
“The “corporate opportunity” cannot be taken by one occupying the fiduciary relationship with the corporation when the proposed activity is reasonably incident to the corporation’s present or prospective business and is one in which the corporation has the capacity to engage. Ibid.
Whether or not a given opportunity constitutes a corporate opportunity is a question of fact to be determined from objective facts and surrounding circumstances existing at the time the opportunity arises.
In determining whether an officer may take advantage of a business opportunity in which the corporation is interested, the courts will consider whether the corporation had an interest, actual or expectant, in the opportunity and whether acquisition by the officer would hinder or defeat the plans of the corporation in carrying on or developing legitimate business for which it was created and, additionally, the courts may consider whether the corporation has the financial resources to take advantage of the particular opportunity. Thompson v Price (1967) 251 Cal.App.2d 182, 59 Cal. Rptr. 174.
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