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The In-House Advisor Published by Shepard Davidson & Renee Inomata

The Fiduciary Duty of Preserving Corporate Opportunities

Posted in Fiduciary Duties

I read a great piece last week by Mark Rogers arguing that corporate directors can unwittingly breach their fiduciary duty by spending too much time on mobile devices during board meetings.  Not only did I agree wholeheartedly with Mark’s analysis, but it also reminded me of another fiduciary duty that company insiders, and even some in-house counsel, often wittingly ignore: the duty to preserve “corporate opportunities” for the company.

In general, an officer, director, partner, LLC member or shareholder in a closely held corporation owes a fiduciary duty not to usurp for his personal benefit, a business opportunity that could and should belong to the corporation.  A classic example of a breach of this duty, which can lead to a claim for what is called the “diversion of a corporate opportunity,” occurs when the president and CEO of a company learns that a competing business is for sale, and, instead of bringing the matter to the company’s board of directors, he helps his son buy the business for himself. 

While the prior example may seem an obvious breach, because a fiduciary must act with “the utmost good faith and loyalty,” and because bad faith is not required to establish the improper diversion of a corporate opportunity, the line between legitimate and illegal conduct, is not always so clear.  Assume, for example, that a member of an LLC sees an advertisement on the Internet for the sale of a company that provides shipping services to the LLC.  Can the member use his own money to purchase that business without fear of being sued for diverting a corporate opportunity?  Maybe, maybe not, depending upon a host of factors specific to the LLC, its formation and the intent of the founders and members.  The only way the member truly can protect himself is to make the LLC and all of its members aware of the opportunity and offer them the right to join in the purchase of the business on equal terms.

How does this relate to in-house counsel?  As an initial matter, because in-house counsel have their own fiduciary duties to their companies, they should be wary of assisting any company insider in any business dealings that are not being pursued on behalf of the company.  Further, if in-house counsel are even made aware of an insider’s knowledge of a business opportunity that might be of interest to the company and/or other insiders, in-house counsel should urge that the opportunity be fully and fairly disclosed to the company and all other insiders.  Indeed, if the insider does not do so, in-house counsel should consider doing so herself to avoid any risk that she could be claimed to have been complicit in a diversion and/or negligent in not fulfilling her fiduciary duty. 

While holding cards close to the vest may sometimes be a good idea, when it comes to corporate opportunities, full and complete disclosure is the best policy for business people and in-house counsel.