The Corporate Opportunity Doctrine prohibits fiduciaries of a corporation from taking opportunities related to the corporation’s business before first offering those opportunities to the company.
Courts in Wisconsin and Illinois have explained that “if the doctrine of business opportunity is to possess any vitality, the corporation or association must be given the opportunity to decide, upon full disclosure of the pertinent facts, whether it wishes to enter into a business that is reasonably incident to its present or prospective operations.”[1] Its core is that a corporation’s fiduciary is not allowed to usurp a business opportunity that was developed through use of corporate assets.
In large or medium sized companies, the doctrine typically works well because a board of directors will see to its enforcement. However, in smaller companies, where there may be few fiduciaries (a single shareholder or a few shareholders/directors/officers) courts have enforced the doctrine more loosely. For example, one court has opined that the corporate opportunity doctrine does not apply to companies with sole shareholders because they “cannot defraud or conceal information from [themselves].”[2] It is also important to note that the doctrine can be waived, regardless of the size of the corporation. If the other fiduciaries knew of the opportunity and either assented to the individual taking it or ratified the action of the individual afterwards, there likely is no breach. Other defenses may be available to a fiduciary alleged to have breached her duty to the corporation if it can be shown that the director or officer acted in good faith, did not use company assets to exploit the opportunity, and/or the opportunity is not essential to the company’s business.
What are the consequences if a breach is found? Individuals who did not disclose an opportunity to the corporation can be held liable for the benefit that they gained from usurping the opportunity and can be ordered to pay restitution to the company. Moreover, a violation of the corporate opportunity doctrine is considered a breach of fiduciary duty, potentially giving rise to punitive damages in extreme cases (punitive damages were awarded in one case where a director usurped business leads through deceit and trickery over 100 times in six years).
The doctrine is applicable to companies, both large and small. However, there is no one-size-fits-all approach to analyzing an alleged breach. Whether there was a breach of a fiduciary duty is rooted in a case-specific, factual analysis. As such, it behooves boards of directors and individual officers and directors to keep accurate and thorough records related to all opportunities that could possibly fall within the doctrine’s scope.
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This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
[1] Kerrigan v. Unity Savings Association, 58 Ill. 2d 20 (1974); Suburban Motors of Grafton v. Forester, 134 Wis. 2d 183 (Ct. App. 1986).
[2] In re Doctors Hospital of Hyde Park, Inc., 474 F.3d 421 (7th Cir. 2007).
