Question

While on vacation, Kyle Kingston, the president and chief executive officer of Remstat, Inc., is called by the CEO of Viokam Corporation, who asks Kingston if Remstat would be interested in buying 25 percent of the outstanding shares of Viokam. Remstat is a billion dollar conglomerate which has contemplated acquiring Viokam for some time. Kingston tells Viokam's CEO that Remstat is not interested. Kingston tells Viokam’s CEO, however, that KKIM, Inc., would be willing to buy the shares of Viokam. Kingston is the 100 percent shareholder of KKIM. Viokam sells the shares to KKIM for $35 million. A year later, KKIM sells the shares for $55 million to a mutual fund company. When Remstat's directors discover KKIM's purchase and sale of the Viokam shares, they bring an action against Kingston on behalf of Remstat. Which of the following is correct?

1. Kingston may be held liable to Remstat because he usurped a corporate opportunity.
2. Kingston may not be held liable to Remstat because he became aware of this opportunity outside the scope of his duties as an officer of Remstat.
3. Kingston may not be held liable to Remstat because he acted within the discretion afforded him under the business judgment rule.
4. Kingston may be held liable to Remstat because he exceeded his authority to act for the corporation.

Answer 1

Given the facts of the question, option A - Kingston may be held liable to Remstat because he usurped a corporate opportunity - appears to be the most correct option.

Usurpation of corporate opportunity is a type of breach of duty which arises when an officer of a company uses an information which he gained by virtue of his employment in that company for personal benefit.

In the given case, Kingston is the CEO of Remstat corporation. Remstat corporation is already contemplating buying the shares of Viokam corporation. This indicates that Kingston is aware about possible profitable opportunities by investing in Viokam.

However, when CEO of Viokam enquires Kingston about willingness of Remstat corproation in purchasing the shares of Viokam, Kingston refuses saying that Remstat is not interested. This indicates falsification by Kingston as Remstat was clearly interested in Viokam Corporation. Instead, Kingston directs investment into Viokam via KKIM Inc. in which he is a 100% shareholder. Later, Kingston enters into a proftable transaction by selling these shares to a mutual fund company.

It is clear from the above case that Kingston has used an information which he gained as CEO of Remstat Corporation to obtain personal profit thorugh KKIM Inc.

Kingston should have shared the opportunities with Remstat Corporation, rather than taking advantage of this opportunity to enrich himself.

The laws of the state in which Remstat Corporation works should also be checked whether the state prohibits "usurpation of corporate opportunity".

If you found the above answer useful, please take a moment to up-vote the same. It will help me serve you better in future!