Opportunity Knocks - Handling Corporate Opportunity Situations

By: Anthony L. Barthel, Esq.

Countless opportunities are presented to businesses every year. While the vast majority of such opportunities are shelved, select opportunities become the lifeblood of the enterprise itself. Often, opportunities never reach the management of the business and are diverted for personal interest or gain. Diversion, misappropriation, or usurpation of corporate opportunities, as they are all commonly known, can be an ill-gotten windfall to some and the death knell to others. An analysis of corporate opportunities is fact intensive and each business person should have a basic understanding of this area of the law.

The “Line of Business” Test

When determining whether a corporate opportunity exists, courts look at two factors. The first factor is the “line of business” test. This test looks at the current business and asks whether the opportunity was closely related to business activity or prospective business of such enterprise. When making this determination, Courts look at all factors including:

• What was the enterprises’ existing transactions and relationship to the opportunity?
• Does the enterprise have the ability to deliver services or products presented by the opportunity?
• Does the enterprise have the financial wherewithal to pursue the opportunity?
• Would the involvement with the opportunity by others associated with enterprise be detrimental to the competitiveness of the existing enterprise?
• Is the business presented by the opportunity essential in the ongoing business vitality of the enterprise or is it merely an aspirational goal?

The “Fairness” Test

The second test courts employ in corporate opportunity determinations is the question of whether or not the manner in which the opportunity was diverted was fair to the person retaining the opportunity and to the enterprise claiming the opportunity was misappropriated. In making this determination, the courts looks at the relationship of the person using the opportunity to the enterprise, for example, whether the person was an officer, director, or owner of the company, or merely an employee. The Court will take into consideration a number of other factors including:

• How did the opportunity arise? Was the opportunity discovered in the course of the enterprise’s business or in one’s personal dealings?
• Was the opportunity presented to the enterprise at any time? Did the enterprise choose not to pursue the opportunity? Was the opportunity concealed from the enterprise?
• Is there any actual harm to the enterprise?

Advice to Employees

Employee have a duty to use employer’s assets for the benefit of the employer only. Even if an employment relationship is terminated, certain confidential information and trade secret information must be maintained and protected for the employer.

Employees must exercise exceptional care in determining whether or not the opportunity presented is one that the enterprise should rightly have. If an employee learns of a business opportunity through anything related to their role as an employee, an employee should carefully filter the opportunity through the criteria of the “business line” and “fairness” tests to determine whether or not the opportunity is related at all to the enterprises’ business. If the opportunity can be connected in any way to the business of its current employer, the employee should do two of the following things. First, the employee should seriously consider disclosing the opportunity to the employer. Second, the employee should employ the services of professionals, to act as a sounding board. Failure to handle the opportunity appropriately can lead to dire consequences, including a complete divestment of the opportunity.

Advice to Owners

Owners in closely held companies have duties of loyalty and fiduciary obligations to its other owners. Just as with employees, owners must carefully consider whether or not the opportunity is that of the enterprise, or whether or not it can be pursued independently. Ownership control agreements can handle alternate procedures by which these opportunities can be pursued by or specifically define limits to competition among its ownership. The safest route is to disclose the opportunity to the enterprise. If the enterprise so chooses to pursue the opportunity, the issue is moot and the owners should pitch-in with the collected efforts of the enterprise to bring the opportunity to market. When the enterprise is not willing to pursue the opportunity, the owner should secure a written authorization to pursue the opportunity on his own, or at the very least a letter from the owner to the enterprise stating that it has been presented with the opportunity.

Advice to Enterprises

Business enterprises must carefully monitor its opportunities. Many times there are not the resources to invest in additional lines of business or related lines of business. Often, enterprises find that the idea that did not seem marketable soon became its direct competitor. Likewise, controls on corporate opportunities have the ability to manage competition against the enterprise by squelching the opportunity before it is capable of serious competition. Even when the opportunity cannot be managed, strategic alliances with the opportunity may be necessary to remain competitive in the marketplace.