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Understanding the Corporate Opportunity Doctrine

fudiciary duty.jpgExecutives, directors, officers, and other corporate agents have a fiduciary duty to their company. In the simplest terms, a fiduciary duty is a legal obligation that requires one to put the interests of another party above their personal interests. This duty comes in many different specific forms. For corporate officers, one important form of fiduciary duty is known as the corporate opportunity doctrine. Essentially, this doctrine is an application of the fiduciary of duty of loyalty. More specifically, it means that corporate agents are not allowed to take any business opportunity for themselves that could have benefited the corporation. In the event that your business interests have been negatively affected by a corporate officer's violation of the corporate opportunity doctrine, please reach out to an experienced San Jose business litigation attorney today to discuss your legal options.

What Constitutes a 'Corporate Opportunity'?

While it is well-established that corporate officers cannot take business opportunities for themselves ahead of their corporation, it can be difficult to define what exactly qualifies as an 'opportunity.' There is also a significant amount of disagreement in courts over how to assess this issue. Currently, courts assess the corporate opportunity doctrine using one of three different tests:

  • The 'interest or expectancy' test: This is the narrowest test. To qualify as an 'opportunity' under this test, a corporation must have an active business interest or expectancy interest in the opportunity in question. An active business interest usually requires an already existing contractual relationship. On the hand, an expectant business interest does not require a current contractual relationship but there still must be a reasonable likelihood that a contractual relationship would blossom in the near future.
  • The 'line of business' test: This is a more expansive test. The line of business test is also the most frequently used test in California right now. Whereas the 'interest or expectancy test' generally only counts current or imminent business projects as opportunities, the 'line of business test' allows any venture that the corporation could reasonably get involved in the near future as a qualifying 'opportunity'. This means that if the corporation could have benefits from the opportunity, based on their resources and skills, corporate agents are prohibited from using that opportunity for personal benefit.
  • The 'fairness' test: Finally, there is also a third, less used, test, known as the 'fairness' test. Under this approach, prospective opportunities are assessed on whether or not they would be fair and equitable for a corporate agent to take for personal gain given their legal obligations to the organization.

Contact Our Office Today

At Diemer, Whitman & Cardosi, LLP, our passionate San Jose business law lawyers have extensive experience protecting the rights of shareholders and business partners. If you believe that your rights have been violated by a corporate executive's breach of their fiduciary duty, please do not hesitate to contact our office today to set up a free review of your case. Our firm proudly represents businesses throughout Northern California, including in Redwood City and Cupertino.

Source:

http://www.fiduciary.ca.gov/laws_regs/ca_code_regs.pdf

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