A common issue faced by the corporate officials of a closely held company is whether they are obligated to pursue new all business opportunities presented to them on behalf of the company, or whether they may do so on their own or with others. A corporate opportunity is generally one (a) that falls within the scope of the company’s line of business, (b) in which the company has a legitimate business interest or reasonable expectancy, (c) that is of practical advantage to the company, and (d) that the company has the resources to legitimately pursue.
Generally, where a corporate official is presented with a business opportunity that meets these criteria, the official must first present the opportunity to the company. Only if the company rejects the opportunity can the official pursue that opportunity for himself. If a corporate official pursues a corporate opportunity for himself without first presenting it to the company, he does so at his peril and may be sued by the company for misappropriation of corporate opportunity and/or for breach of fiduciary duty.
Disputes often arise between companies and their (sometimes former) corporate officials about whether (1) the opportunity was one in which the company had a legitimate expectation or interest, (2) whether the company has the financial ability to pursue the opportunity, or (3) whether the official gave the company a meaningful opportunity to pursue the opportunity before doing so for himself. The more thorough the documentation or other evidence relating to the business opportunity and/or to the relationships between the parties, the more straightforward the analysis as to whether the opportunity constitutes a corporate opportunity and the more likely the dispute can be resolved without extensive litigation. However, all too often, such evidence is unavailable or is in conflict with other evidence. In these instances, the murky question of whether the opportunity belongs to the company can become an issue for a jury to decide at trial.
Among the factors that are often persuasive with judges and juries in answering this question are: a) whether there exists a long-term or exclusive relationship between the company and the individual or entity that constitutes the opportunity; b) whether the company’s organizational documents such as operating agreements, shareholder agreements, or by-laws expressly prohibit, or conversely, expressly allow corporate officials to engage in business endeavors that compete with the company; c) whether the company has successfully pursued similar opportunities in the past; d) whether the official pursued the opportunity openly or surreptitiously; e) whether the company has the financial resources, manpower and/or expertise to legitimately pursue the opportunity; f) whether the opportunity results from the relationships created while the corporate official was acting on behalf of the company or whether the official formed the relationships prior to his association with the company.
There are pragmatic issues that must also be considered in connection with asserting or defending misappropriation of corporate opportunity claim. If the customers or business partners that constitute the business opportunity in dispute learn of the existence of the dispute, they may simply decline to do business with either the company or the official rather than to become embroiled in the dispute themselves. An old saying about not tossing the baby out with the bathwater comes to mind. Resolving what often amounts to very complex disputes concerning the appropriation of business opportunities, by negotiation when possible and by litigation when necessary, requires a delicate balancing act between aggressively pursuing rights of the company or its official, while simultaneously maintaining the business relationships that constitute the opportunity in dispute. Experienced counsel can help.