An Outline of the Corporate Opportunity Doctrine

The corporate opportunity doctrine is a principle in law which states that the directors, officers and major shareholders of a firm may not pursue for private, personal gain a business opportunity which would normally go to benefit the firm. Mitchell Marinella and Christopher Dean of the American Bar Association explain that officers of a private corporation have a responsibility not to “exploit an opportunity related to the corporation’s business unless he or she first offers that opportunity to the corporation.”

The legislation and case law governing the responsibilities of corporate officials varies between jurisdictions, but the general principles are the same across the United States and in countries with similar legal systems, like the United Kingdom and Canada. Essentially, states the Cornell Legal Information Institute, all “directors, officers, and controlling shareholders in a corporation” have legal responsibilities to ensure that they do not take private advantage of their positions to the detriment of the corporation. The corporate opportunity doctrine refers to one such restriction on the behavior of corporate officers and directors.

Such officers will occasionally, in the course of their work, come across business opportunities which the corporation could take advantage of, but which the officers in question also have the personal contacts and resources necessary to take advantage of by themselves. In such situations, the doctrine does not prohibit officers from pursuing private opportunities completely. It does mean, however, that they are permitted to do so personally only if the corporation has decided to pass on the opportunity.

To that end, the doctrine prevents officers from putting themselves in a position where they would have a conflict of interest between their professional responsibilities to the corporation and their own private business interests. In Delaware, for instance, the court created a four-part test in Guth v. Loft (1939) based on whether the corporation could take advantage of a business opportunity, whether the opportunity occurred in an area of business where the company was normally engaged, whether the corporation could reasonably expect to compete for the opportunity under normal circumstances and whether in taking the opportunity for themselves officers were acting to the detriment of the corporation.

For instance, says Rustam Juma of the law firm Fraser Milner Casgrain, in the historical but important Canadian case Cook v. Deeks, several directors of a corporation already doing business laying track for a major national railroad decided to form a separate syndicate of their own and approach the railroad offering superior terms. This amounted to undermining the first corporation, on whose board they sat, to the benefit of their own, new partnership. In that case, the court found that the directors had breached trust with the corporation and that their contract talks with the railroad had been illegal.

The corporate opportunity doctrine does not apply to individuals who are not “directors, officers, or controlling shareholders,” although other laws, or corporate policies, may apply to other employees. Individuals who are in a potential conflict of interest should be familiar with the relevant legal doctrines and regulations, and seek legal advice before rather than after entering into a potentially problematic business relationship. Corporations can pursue those who violate the opportunity doctrine in court, and they can demand the profits form the illegal private venture by way of compensation.