Usurping a Corporate Opportunity

What Is a Corporate Opportunity?

A corporate opportunity is a legal principle prohibiting a corporation’s director, officer, and majority shareholder from taking or diverting business opportunities away from the corporation for their personal benefit. A corporate opportunity occurs when a specific activity or opening that is related to the company’s current or planned business dealings and the company can take part in.

Companies consider several factors when determining whether or not a prospective investment or deal can be categorized as a corporate opportunity:

• To what extent the opportunity relates to the corporation’s business practices
• How the director or corporate officer found the opportunity
• The possible benefits of the opportunity for the business
• Whether the business is lawfully able to pursue the opportunity
• Whether the company can expect to take advantage of the business opportunity

What is a Breach of the Corporate Opportunity Doctrine?

The corporate opportunity doctrine is a legal principle that prohibits corporate directors, corporate officers, and majority shareholders from violating their fiduciary duty and abusing their position by exploiting business opportunities related to the corporation’s business for their personal benefit. For example, if a company owner discovers a business opportunity that could be lucrative for them personally, but the opportunity is in the same field or a field related to the corporation, they must first offer the business opportunity to the corporation.

When individuals pursue an opportunity in the same business as the corporation for personal benefit, they violate their fiduciary duty. Therefore, in this situation, the individual also violates the corporate opportunity doctrine.

Suppose a corporate officer pursues a business opportunity at the corporation’s expense and does not offer it to the corporation first. In that case, the company can take legal action against them for violating their duties.

What is an Example of Usurping a Corporate Opportunity?

For example, let’s say that three people own equal shares in a men’s clothing store that sells designer jeans and shirts. The shop buys its jeans and shirts from a wide range of distributors across the country.

However, one of the owners decides to sell men’s jeans on the side. He finds a buyer who offers a lucrative deal and begins to profit. Yet, this person keeps all the profits for himself and does not mention his side business to the other two owners.

Since the clothing store sells designer jeans, the person’s violation is obvious. Accordingly, he violates his fiduciary duty to the clothing company and the corporate opportunity doctrine.

However, what if the person sold neckties to the buyer, not the jeans and shirts that the store normally sells?

This scenario is more complex. However, if the neckties are viewed as a logical extension of the men’s clothing line, the person who sold them on the side would probably be at fault.

What Are Solutions for Stealing a Corporate Opportunity?

When an officer or director usurps a corporate opportunity for themselves, they violate the trust of their fellow directors and officers. However, there exist many different lawful solutions for this scenario, including:

• Actual Damages: When someone usurps a business opportunity away from a corporation, the business can collect damages. These damages compensate the company for the problems the officer caused and make up for the loss of financial opportunity.

• Constructive Trust: When a company member decides to enrich themselves instead of helping the corporation build its wealth, they violate the corporate opportunity doctrine. The court may move to impose a constructive trust on the individual’s profits, meaning that all of the profit created by the stolen opportunity would go directly to the company.

• Punitive Damages: In extreme cases of stolen corporate opportunities, the court may grant punitive damages to the company based on the individual’s actions. These damages punish the defendant by making them pay additional fees and the actual damages. When the court does punitive award damages in cases of stolen corporate opportunities, the goal is not only to punish the defendant but to provide assurance that companies will not tolerate this type of egregious conduct.

When Should Individuals Seek Legal Assistance?

At Nakase Wade, we represent small businesses, large companies, and individuals who seek legal guidance and relief from disputes.

If an individual usurps a corporate opportunity at your business, you must act quickly to collect damages and prevent this damaging action from happening again.