Corporate Opportunity Doctrine
Directors and officers may not usurp a business opportunity that belongs to the corporation. If a fiduciary takes a corporate opportunity for personal gain without first offering it to the corporation, they have breached their duty of loyalty and must disgorge profits.
Elements
Delaware (Guth test) — An opportunity is “corporate” if:
- The corporation is financially able to exploit the opportunity
- The opportunity is in the corporation’s line of business
- The corporation has an interest or expectancy in the opportunity
- Embracing the opportunity would create a conflict between the fiduciary’s self-interest and the corporation’s
ALI test (§ 5.05) — A director or officer may not take any opportunity that:
- The corporation would reasonably be expected to be interested in, AND
- The director/officer became aware of in their corporate capacity (not as an individual)
The ALI test is somewhat broader — it focuses on how the fiduciary learned of the opportunity, not just whether it falls in the line of business.
Safe Harbors
A fiduciary may take the opportunity without breaching the duty of loyalty if:
- The opportunity was fully disclosed to disinterested directors and they rejected it on behalf of the corporation, OR
- The corporation was legally or financially unable to take the opportunity, OR
- The charter or a shareholder vote authorizes the fiduciary to take the opportunity (DGCL § 122(17))
Remedies
If a fiduciary usurps a corporate opportunity, the corporation may:
- Impose a constructive trust on the profits derived
- Recover the profits the fiduciary made
- In some cases, obtain an order transferring the opportunity back to the corporation
Policy
- Prevents insiders from appropriating value generated by their corporate position for personal gain
- Protects shareholders’ investment in the corporation’s growth prospects
- The “line of business” limitation avoids chilling all outside business activity by corporate insiders — fiduciaries retain some ability to pursue personal opportunities unrelated to the corporation
Key Cases
| Case | Rule |
|---|---|
| Guth v. Loft, Inc. (Del. 1939) | Pepsi-Cola franchise opportunity belonged to Loft corporation; CEO usurped it; liable for profits |
| Broz v. Cellular Information Systems (Del. 1996) | FCC license opportunity not a corporate opportunity of CIS because it could not exploit it; Broz had no obligation to offer it first |
| Northeast Harbor Golf Club, Inc. v. Harris (Me. 1995) | Applies ALI test; president’s purchase of adjacent property in her own name was a corporate opportunity because she learned of it in her corporate capacity |
| In re eBay, Inc. Shareholders Litigation (Del. Ch. 2004) | IPO allocation opportunities given to eBay’s directors were corporate opportunities; directors usurped them |