Corporate directors and officers owe a fiduciary duty to the company not only to safeguard business assets — but they also cannot usurp business opportunities for personal gain. Closely related to self-dealing, the corporate opportunity doctrine precludes corporate fiduciaries from engaging in the promotion of interests that are not compatible with the superior interests of the company. Generally, the fiduciary duty also extends to opportunities the corporation is unwilling or financially unable to take.
What is a Corporate Opportunity?
A corporate opportunity is any prospective venture by which a company can make a profit in its field. However, determining whether a corporate opportunity exists requires a factual inquiry. New York courts typically apply one of three tests to determine whether the opportunity constitutes a corporate opportunity:
- Initial understanding test — When the “initial understanding test” is applied, a court will examine whether the parties understood at the beginning of the fiduciary relationship that the fiduciary would pursue other ventures at the same time. This also includes opportunities related to or in direct competition with the corporation’s interests.
- Tangible expectancy test — Under the “tangible expectancy test,” a court will evaluate whether the corporation has a “tangible expectancy” in the opportunity — this has been defined as something less than outright ownership but more than merely subjective hope.
- Line of business test — The “line of business” test assesses whether the opportunity that was diverted is the same as, is necessary for, or its essential to the business of the corporation.
To bring a claim for theft of corporate opportunity, a plaintiff must not only establish that the corporation had a valid interest in the opportunity, but also that the fiduciary profited at the company’s expense. A common example of theft of corporate opportunity involves situations where a corporate fiduciary transfers assets belonging to the company into a new company that operates within the same business to avoid sharing proceeds with business partners.
Theft of Corporate Opportunity Claims Remedies and Defenses
A fiduciary who diverts a corporate opportunity may be sued for their wrongdoing. A variety of statutory and equitable remedies can be imposed. A court may award actual damages and punitive damages, in addition to ordering an accounting, a constructive trust, injunctive relief, rescission of shareholder agreements, and dissolution of the company.
There are several common defenses to corporate opportunity claims. For example, if the corporation learns of the fiduciary’s conduct and consents to it, a cause of action for usurpation of corporation opportunity cannot be sustained. Full disclosure may be enough sometimes to support a fiduciary’s acquisition of a corporate opportunity.
Even where no disclosure was made, a theft of corporation opportunity claim may not succeed if the corporation previously let the defendant pursue opportunities falling in line with those of the business. A fiduciary may also try to argue in their defense that the company refused to take advantage of the opportunity — or that the corporation did not suffer injury due to their acquisition of the opportunity.
Contact an Experienced New York Business Law Attorney
If you are facing a theft of corporate opportunity matter, it’s crucial to have experienced representation to help you navigate the legal process. The New York business attorneys at Brinen & Associates provide skillful counsel for a wide variety of commercial matters, including those involving theft of corporate opportunity claims. Call (212) 330-8151 or send us a message to learn more about how we can help.