Corporate Governance: What is the Corporate Opportunity Doctrine?

In general, the officers and directors of a San Diego corporation owe various duties to the corporation (and to the corporation’s shareholders — its owners). Among the duties are to always act in the best interest of the corporation and take no actions that harm the corporation. In simple terms, corporate officers and directors have a duty of loyalty. Part of this duty of loyalty is what is called the corporate opportunity doctrine. The corporate opportunity doctrine mandates that a corporate officer and/or director cannot take for himself/herself a business or financial opportunity that would otherwise have gone to or benefited the corporation. If you have questions about whether an opportunity is a corporate opportunity, you should seek advice and counsel from an experienced San Diego corporate attorney.

To provide an example: Imagine that your San Diego corporation is looking to buy certain raw materials at a certain price — say $10 per ton. Through research done on company time, your corporate officers locate the raw materials at $8 per ton. But instead of having the corporation buy the materials at $8 per ton, the corporate officers buy the materials at $8 per ton and then sell those materials to the corporation at $9 per ton. That is a misappropriated corporate opportunity. Your corporation had the opportunity to save $2 per ton, but only realized a savings of $1 per ton.

When California courts apply the corporate opportunity doctrine, there are many factors that the courts evaluate. These include:

  • Does the corporation have an “expectancy” or interest in the opportunity — in our example, the corporation needed and used the raw materials, so this factor is satisfied
  • Was the opportunity presented to the officer in his/her corporate or individual capacity? — in our example, the opportunity was first presented to the officers in their corporate capacity
  • Were corporate resources used in finding the opportunity? — in our example, the answer is in the affirmative
  • Is the “expectancy” or interest current or reasonably foreseeable in the near future — this factor is more nuanced; a generalized discussion of needing some raw material ten years into the future probably does not count as a corporate opportunity
  • Is the opportunity reasonably incident to the corporation’s present or prospective business — this is often called the “line of business” test — if the opportunity is not in the company’s line of business, very likely the corporate officers may exploit the opportunity for themselves
  • Is the corporation able to undertake or exploit the opportunity — this is an easy prong to meet because most corporations can borrow or find resources to exploit an opportunity that becomes available
  • Do the corporation officers — who take the opportunity for themselves — come into conflict with their corporation by taking the opportunity?

Contact San Diego Corporate Law

For more information, call Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard focuses his practice on business law, transactional, and corporate matters, and he proudly provides legal services to business owners in San Diego and the surrounding communities. Mr. Leonard has extensive experience in drafting company policies and procedures and all other contracts and agreements necessary for running your business. Mr. Leonard can be reached at (858) 483-9200 or via email. Like us on Facebook.

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