Unfortunately, high-ranking corporate officers and other executives may take advantage of “corporate opportunities” for private, personal reasons far more often than anyone knows, often causing hard-to-measure financial losses to their corporations. In an effort to curtail such offenses that often go unnoticed, courts have devised four different tests to help them decide when a “corporate opportunity” has been wrongfully usurped or misused by a corporate officer.
Here's a brief summary of these “tests” or inquiries that can help resolve lawsuits brought against corporations by shareholders who allege disloyal and harmful corporate activities.
The Four Major Inquiries That Can Help Resolve “Corporate Opportunity” Disputes
Did the allegedly “wronged” corporation have a proper “expectancy” or contractual right to make use of the “corporate opportunity”-- that its corporate officer or director diverted elsewhere for his/her own (or someone else’s) gain? Hypothetical Fact Situation: Assume that ABC Corporation is building a variety of medical clinics on vast acreage it owns in a small Virginia community. Next, assume a construction company, XYZ Corporation, is eager to win future contracts from ABC Corporation and offers its services at a highly competitive fee to one of ABC Corporation’s board of directors, Mr. Jones. You should also assume that XYZ has done prior business with ABC Corporation.
However, Mr. Jones of ABC Corporation takes personal advantage of the offer instead, and convinces XYZ to make the same immediate offer to a nearby company he/owns and runs. This part of the four-pronged test would probably be satisfied (against the wayward corporate officer), especially since ABC Corporation and XYZ had done prior business with each other;
In the” line of business.” Somewhat related to the first test or inquiry above, this second one looks at whether or not the “corporate opportunity” in question was one that should be viewed as “in the line of business” of the contact party’s corporation. In other words, would a reasonable person have known that the offer was being made solely to the corporation the corporate officer now serves – and not to some outside business entity favored by the corporate officer -- that handles very dissimilar business transactions;
The “fairness” test. This inquiry looks at the extent of damage the “intended” corporation may suffer as a result of one of its officers failing to reveal a “corporate opportunity” extended for its presumed benefit. The court will use this to check and see if the corporate officer who chose to keep the “corporate opportunity” private had ever personally done business with the party presenting the opportunity in the past -- to see if there was any reasonable basis for why the officer diverted the opportunity for his/her own purposes – instead of making it known to the corporation the officer now serves;
A combination approach. In some cases, courts may combine two of the inquiries above when trying to resolve this kind of lawsuit. For example, the court might first check to see if the “corporate opportunity” was one that was in the corporation’s “line of business” -- and then inquire if it was in any way “fair” for that opportunity to be diverted elsewhere by its own officer or executive. The extent of the corporate damages or losses would play a key role in the court’s decision.
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