What is a “Corporate Opportunity”?
If you are a major shareholder or owner of a corporation or limited liability company, you owe certain fiduciary duties to your company and to the other owners. One of the fiduciary duties that is owed is the duty to not divert corporate opportunities to yourself or to anyone else. For example, if it would be beneficial for your company to enter into a business relationship with a large customer, you cannot divert that customer to some other business you own or to a business owned by your best friend. Fiduciary duties also apply to members of a board of directors and to senior management.
In most circumstances, it is easy for others and for a court to determine that a corporate opportunity has been diverted. However, there are a few circumstances in which it is not so clear. An experienced San Diego corporate attorney can provide advice and guidance if there is doubt about the correctness of some proposed course of action. Courts here in the Golden State have used three tests or factors when identifying a corporate opportunity:
- The “line of business” test
- The “interest or expectancy” test and
- The “fairness” test
The example mentioned above is typical of the first test. If your company sells some product to Customer A and you convince Customer A to go to another company, you have diverted a corporate opportunity and, thereby breached your fiduciary duty. The second test — interest or expectancy — is somewhat more complex. This test generally covers situations in which a real estate purchase or sale or some new business venture is being contemplated. There is an expectancy of some sort and, if you are a member of the board or an owner or part of upper management, you breach your duties if you interfere. The fairness test is a catchall category used by California courts when the facts do not squarely fit into the first two tests. In general, the courts evaluate all the tests and whether a corporate fiduciary has breached his or her duty does not depend on any single factor.
An interesting case was decided a couple of years ago when the California Court of Appeals held that certain owners/members of a limited liability company (“LLC”) could not divert corporate opportunities where the company did not conduct any business. See Maaskamp v. Wortrich, Case No. G050962 (Cal. App. 4th Dist. 2017) (unpublished). We discussed this case in an earlier article in reference to the enforcement of confidentiality agreements. But the case also dealt with allegations that the members of the LLC diverted corporate opportunities. In that case, the LLC in question — Data, LLC — did not engage in any business. Its only function was to be the holder/owner of certain patent rights and to pass through to other companies and individuals payments secured through patent licensing agreements. Allegations were made that certain corporate opportunities were diverted by one of the members of the LLC. However, the Court of Appeals rejected the argument. Since Data, LLC did not conduct any business, there was no corporate opportunity shown based on the “line of business” test. Further, there was no evidence provided to the court that Data, LLC was intending to engage in any business. As such, the “expectancy” test was not met. The court also rejected any argument based on general “fairness.”