“Corporate Opportunity” is a bit of a misnomer, as it applies to all types of businesses, but we didn’t come up with the name and we’re stuck with it. In agency law, agents cannot compete with the principal. The only time an agent is permitted to take a business opportunity that the principal would consider taking is to receive a waiver by the principal through approaching the principal in good faith, disclosing all material facts, and receiving the principal’s approval. This applies to all agents of businesses, but the scope of the prohibition varies depending on the role of the agent.
In partnerships, partners are required to refrain from competing. There is a flat prohibition on competing with the principal’s business, however the partners can establish specific categories in the partnership agreement that they will authorize (as long as they do not violate the duty of loyalty). In LLC’s, this topic is treated identically to partnerships except that in manager-managed LLC’s the non-managing members are free to compete and there is no prohibition.
In corporations, the rule is a flat prohibition on taking corporate opportunities; however, the debate is whether the potential opportunity is truly considered a corporate opportunity. the analysis to determine if the director officer may partake in the opportunity is looked at through the totality of the circumstances. The key components are: 1) whether the director or officer learned about the opportunity in his or her personal or corporate capacity, 2) was the corporation financially able to exploit the opportunity, 3) is the opportunity within the corporation’s line of business, 4) does the corporation have an interest or expectancy in the opportunity, and 5) by taking the opportunity, will the director or officer be placed in a position that may conflict with his/her duties to the corporation? Similar to other entities, the board can determine that this is not competing and allow the director or officer to take the opportunity. This type of waiver would be analyzed under the business judgment rule.
In other words, if you are an agent of a business, in any capacity, you cannot take an opportunity or make a deal that should have gone to the business.Next: Related Issues
© 2016 John V. Robinson, P.C.