Question

What does the corporate opportunity doctrine state, and what factors does the court examine to determine whether an opportunity belongs to a corporation?

Answer 1

The corporate opportunity doctrine states about the responsibilities of directors, officers and controlling stakeholders that not to take opportunities without telling it first to the BOD i.e. Board of Directors. It is the fiduciary duty of these persons to first make the Board known that could benefit the corporation and being loyal towards their duty and corporation. Officers and Directors do not have right to divert the corporate and make their own and if the director or corporate officer does that then he commits a breach of fiduciary duty.

The court examine to determine whether an opportunity belongs to a corporation by applying the traditional tests from the case of Guth v. Loft:

1. the claimed opportunity arose out of a pre-existing right, interest or expectancy of the business;

2. the opportunity was in the businesse's line of business; or

3. the opportunity was of practical advantage to the business.

but in some modern cases courts have taken strict view as mentioned under The American Law Institue (ALI) which also borrows substantially from the Guth's test's. Under the ALI's test's general rule :

a.director or senior executive may not take advantage of a corporate opportunity unless:

(1) The director or senior executive first offers the corporate opportunity to the corporation and makes diclosures concerning the conflict of interest and the corporate opportunity and

(2) The corporate opportunity is rejected by the corporation . and the rejection must satisfy several conditions:

(A) The rejection of the opportunity must be fair to the corporation.;

(B) The opportunity must be rejected in advance, folowing such disclosure, by disinterested directors, or in the case of a senior executive who is not a director, by a disinterested superior, in am manner that statisfies the standards of the business judgement rule; or

(C) The rejection must be authorised in advance or ratified, following such disclosure, by disinterested shareholders, and the rejection must not be equivalent to a waste of corporate assets.