Opinion ID: 2052439
Heading Depth: 1
Heading Rank: 4

Heading: application of the corporate opportunity doctrine

Text: The doctrine of corporate opportunity represents but one species of the broad fiduciary duties assumed by a corporate director or officer. A corporate fiduciary agrees to place the interests of the corporation before his or her own in appropriate circumstances. In light of the diverse and often competing obligations faced by directors and officers, however, the corporate opportunity doctrine arose as a means of defining the parameters of fiduciary duty in instances of potential conflict. The classic statement of the doctrine is derived from the venerable case of Guth v. Loft, Inc . In Guth, this Court held that: if there is presented to a corporate officer or director a business opportunity which the corporation is financially able to undertake, is, from its nature, in the line of the corporation's business and is of practical advantage to it, is one in which the corporation has an interest or a reasonable expectancy, and, by embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of the corporation, the law will not permit him to seize the opportunity for himself. Guth, 5 A.2d at 510-11. The corporate opportunity doctrine, as delineated by Guth and its progeny, holds that a corporate officer or director may not take a business opportunity for his own if: (1) the corporation is financially able to exploit the opportunity; (2) the opportunity is within the corporation's line of business; (3) the corporation has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimicable to his duties to the corporation. The Court in Guth also derived a corollary which states that a director or officer may take a corporate opportunity if: (1) the opportunity is presented to the director or officer in his individual and not his corporate capacity; (2) the opportunity is not essential to the corporation; (3) the corporation holds no interest or expectancy in the opportunity; and (4) the director or officer has not wrongfully employed the resources of the corporation in pursuing or exploiting the opportunity. Guth, 5 A.2d at 509. Thus, the contours of this doctrine are well established. It is important to note, however, that the tests enunciated in Guth and subsequent cases provide guidelines to be considered by a reviewing court in balancing the equities of an individual case. No one factor is dispositive and all factors must be taken into account insofar as they are applicable. Cases involving a claim of usurpation of a corporate opportunity range over a multitude of factual settings. Hard and fast rules are not easily crafted to deal with such an array of complex situations. As this Court noted in Johnston v. Greene, Del. Supr., 121 A.2d 919 (1956), the determination of [w]hether or not a director has appropriated for himself something that in fairness should belong to the corporation is `a factual question to be decided by reasonable inference from objective facts.' Id. at 923 (quoting Guth, 5 A.2d at 513). In the instant case, we find that the facts do not support the conclusion that Broz misappropriated a corporate opportunity. We note at the outset that Broz became aware of the Michigan-2 opportunity in his individual and not his corporate capacity. As the Court of Chancery found, Broz did not misuse proprietary information that came to him in a corporate capacity nor did he otherwise use any power he might have over the governance of the corporation to advance his own interests. 663 A.2d at 1185. This fact is not the subject of serious dispute. In fact, it is clear from the record that Mackinac did not consider CIS a viable candidate for the acquisition of Michigan-2. Accordingly, Mackinac did not offer the property to CIS. In this factual posture, many of the fundamental concerns undergirding the law of corporate opportunity are not present ( e.g., misappropriation of the corporation's proprietary information). The burden imposed upon Broz to show adherence to his fiduciary duties to CIS is thus lessened to some extent. See Science Accessories Corp., 425 A.2d at 964 (holding that because opportunity to purchase new technology was an `outside' opportunity not available to SAC, defendants' failure to disclose the concept to SAC and their taking it for themselves for purposes of competing with SAC cannot be found to be in breach of any agency fiduciary duty). Nevertheless, this fact is not dispositive. The determination of whether a particular fiduciary has usurped a corporate opportunity necessitates a careful examination of the circumstances, giving due credence to the factors enunciated in Guth and subsequent cases. We turn now to an analysis of the factors relied on by the trial court. First, we find that CIS was not financially capable of exploiting the Michigan-2 opportunity. Although the Court of Chancery concluded otherwise, we hold that this finding was not supported by the evidence. Levitt, 287 A.2d at 673. The record shows that CIS was in a precarious financial position at the time Mackinac presented the Michigan-2 opportunity to Broz. Having recently emerged from lengthy and contentious bankruptcy proceedings, CIS was not in a position to commit capital to the acquisition of new assets. Further, the loan agreement entered into by CIS and its creditors severely limited the discretion of CIS as to the acquisition of new assets and substantially restricted the ability of CIS to incur new debt. The Court of Chancery based its contrary finding on the fact that PriCellular had purchased an option to acquire CIS' bank debt. Thus, the court reasoned, PriCellular was in a position to exercise that option and then waive any unfavorable restrictions that would stand in the way of a CIS acquisition of Michigan-2. The trial court, however, disregarded the fact that PriCellular's own financial situation was not particularly stable. PriCellular was unable to finance the acquisition of CIS through conventional bank loans and was forced to use the more risky mechanism of a junk bond offering to raise the required capital. Thus, the court's statement that PriCellular had other sources of financing to permit the funding of that purchase is clearly not free from dispute. Moreover, as discussed infra, the fact that PriCellular had available sources of financing is immaterial to the analysis. At the time that Broz was required to decide whether to accept the Michigan-2 opportunity, PriCellular had not yet acquired CIS, and any plans to do so were wholly speculative. Thus, contrary to the Court of Chancery's finding, Broz was not obligated to consider the contingency of a PriCellular acquisition of CIS and the related contingency of PriCellular thereafter waiving restrictions on the CIS bank debt. Broz was required to consider the facts only as they existed at the time he determined to accept the Mackinac offer and embark on his efforts to bring the transaction to fruition. Guth, 5 A.2d at 513. Second, while it may be said with some certainty that the Michigan-2 opportunity was within CIS' line of business, it is not equally clear that CIS had a cognizable interest or expectancy in the license. [7] Under the third factor laid down by this Court in Guth, for an opportunity to be deemed to belong to the fiduciary's corporation, the corporation must have an interest or expectancy in that opportunity. As this Court stated in Johnston, 121 A.2d at 924, [f]or the corporation to have an actual or expectant interest in any specific property, there must be some tie between that property and the nature of the corporate business. Despite the fact that the nature of the Michigan-2 opportunity was historically close to the core operations of CIS, changes were in process. At the time the opportunity was presented, CIS was actively engaged in the process of divesting its cellular license holdings. CIS' articulated business plan did not involve any new acquisitions. Further, as indicated by the testimony of the entire CIS board, the Michigan-2 license would not have been of interest to CIS even absent CIS' financial difficulties and CIS' then current desire to liquidate its cellular license holdings. [8] Thus, CIS had no interest or expectancy in the Michigan-2 opportunity. Cf. Guth, 5 A.2d at 514 (holding that Loft had an interest or expectancy in the Pepsi opportunity by virtue of its need for cola syrup for use in its retail stores). Finally, the corporate opportunity doctrine is implicated only in cases where the fiduciary's seizure of an opportunity results in a conflict between the fiduciary's duties to the corporation and the self-interest of the director as actualized by the exploitation of the opportunity. In the instant case, Broz' interest in acquiring and profiting from Michigan-2 created no duties that were inimicable to his obligations to CIS. Broz, at all times relevant to the instant appeal, was the sole party in interest in RFBC, a competitor of CIS. CIS was fully aware of Broz' potentially conflicting duties. Broz, however, comported himself in a manner that was wholly in accord with his obligations to CIS. Broz took care not to usurp any opportunity which CIS was willing and able to pursue. Broz sought only to compete with an outside entity, PriCellular, for acquisition of an opportunity which both sought to possess. Broz was not obligated to refrain from competition with PriCellular. Therefore, the totality of the circumstances indicates that Broz did not usurp an opportunity that properly belonged to CIS.
In concluding that Broz had usurped a corporate opportunity, the Court of Chancery placed great emphasis on the fact that Broz had not formally presented the matter to the CIS board. The court held that in such circumstances as existed at the latest after October 14, 1994 (date of PriCellular's option contract on Michigan 2 RSA) it was the obligation of Mr. Broz as a director of CIS to take the transaction to the CIS board for its formal action.... 663 A.2d at 1185. In so holding, the trial court erroneously grafted a new requirement onto the law of corporate opportunity, viz., the requirement of formal presentation under circumstances where the corporation does not have an interest, expectancy or financial ability. The teaching of Guth and its progeny is that the director or officer must analyze the situation ex ante to determine whether the opportunity is one rightfully belonging to the corporation. If the director or officer believes, based on one of the factors articulated above, that the corporation is not entitled to the opportunity, then he may take it for himself. Of course, presenting the opportunity to the board creates a kind of safe harbor for the director, which removes the specter of a post hoc judicial determination that the director or officer has improperly usurped a corporate opportunity. Thus, presentation avoids the possibility that an error in the fiduciary's assessment of the situation will create future liability for breach of fiduciary duty. It is not the law of Delaware that presentation to the board is a necessary prerequisite to a finding that a corporate opportunity has not been usurped. The numerous cases decided since Guth are in full accord with this view of the doctrine. For instance, in Field v. Allyn, Del. Ch., 457 A.2d 1089 (1983), the Court of Chancery held that a director or officer is free to take a business opportunity for himself once the corporation has rejected it or if it can be shown that the corporation is not in a position to take the opportunity. The Field court held this to be true even if the fiduciary became aware of the opportunity by virtue of the fiduciary's position in the corporation. Id. at 1099. Notably, this Court affirmed the Field holding on the basis of the well reasoned opinion of the court below. Field v. Allyn, Del.Supr., 467 A.2d 1274 (1983). Field is not unique, however. The view that presentation to the board is not required where the opportunity is one that the corporation is incapable of exercising is also expressed in other cases. See, e.g., Wolfensohn v. Madison Fund, Inc., Del.Supr., 253 A.2d 72, 76 (1969). Other cases, such as Kaplan v. Fenton, Del.Supr., 278 A.2d 834 (1971), have found no violation of the corporate opportunity doctrine where the director determined that the corporation was not interested in the opportunity, but never made formal presentation to the board. The director in Kaplan asked the CEO and another board member if the corporation would be interested in the opportunity and whether he should present the opportunity to the board. These questions were answered in the negative and the director then acquired the opportunity for himself. The Kaplan Court found no breach of the doctrine, despite the absence of formal presentation. [9] The Court of Chancery cited Yiannatsis v. Stephanis, Del.Supr., 653 A.2d 275 (1995), in support of the proposition that formal presentation to the board of directors is a necessary prerequisite to a corporate fiduciary taking an opportunity for his own. See 663 A.2d at 1182. In Yiannatsis, the opportunity in question was a block of stock in a closely held corporation, the holder of which was subject to a right of first refusal held by the corporation. Two of the three directors of the corporation caused the company to refuse the opportunity and, as a result, the corporation never invoked its right of first refusal. This Court held that the corporate fiduciaries had acted surreptitiously to keep the opportunity from being exercised by the corporation, when they had no reasonable ground to believe that the corporation would not be interested therein. This background of bad faith is not present in the case at bar. Here, Broz had substantial reason to believe that CIS was not interested in or able to take advantage of the Michigan-2 opportunity. Accordingly, Yiannatsis is not relevant to the analysis here. Thus, we hold that Broz was not required to make formal presentation of the Michigan-2 opportunity to the CIS board prior to taking the opportunity for his own. In so holding, we necessarily conclude that the Court of Chancery erred in grafting the additional requirement of formal presentation onto Delaware's corporate opportunity jurisprudence. [10]
In concluding that Broz usurped an opportunity properly belonging to CIS, the Court of Chancery held that [f]or practical business reasons CIS' interests with respect to the Mackinac transaction came to merge with those of PriCellular, even before the closing of its tender offer for CIS stock. Based on this fact, the trial court concluded that Broz was required to consider PriCellular's prospective, post-acquisition plans for CIS in determining whether to forego the opportunity or seize it for himself. Had Broz done this, the Court of Chancery determined that he would have concluded that CIS was entitled to the opportunity by virtue of the alignment of its interests with those of PriCellular. We disagree. Broz was under no duty to consider the interests of PriCellular when he chose to purchase Michigan-2. As stated in Guth, a director's right to appropriate [an]... opportunity depends on the circumstances existing at the time it presented itself to him without regard to subsequent events. Guth, 5 A.2d at 513. At the time Broz purchased Michigan-2, PriCellular had not yet acquired CIS. Any plans to do so would still have been wholly speculative. Accordingly, Broz was not required to consider the contingent and uncertain plans of PriCellular in reaching his determination of how to proceed. Whether or not the CIS board would, at some time, have chosen to acquire Michigan-2 in order to make CIS a more attractive acquisition target for PriCellular or to enhance the synergy of any combined enterprise, is speculative. The trial court found this to be a plausible scenario and therefore found that, pursuant to the factors laid down in Guth, CIS had a valid interest or expectancy in the license. This speculative finding cuts against the statements made by CIS' Chief Executive and the entire CIS board of directors and ignores the fact that CIS still lacked the wherewithal to acquire Michigan-2, even if one takes into account the possible availability of PriCellular's financing. Thus, the fact of PriCellular's plans to acquire CIS is immaterial and does not change the analysis. In reaching our conclusion on this point, we note that certainty and predictability are values to be promoted in our corporation law. See Williams v. Geier, Del.Supr., 671 A.2d 1368, 1385 n. 36 (1996). Broz, as an active participant in the cellular telephone industry, was entitled to proceed in his own economic interest in the absence of any countervailing duty. The right of a director or officer to engage in business affairs outside of his or her fiduciary capacity would be illusory if these individuals were required to consider every potential, future occurrence in determining whether a particular business strategy would implicate fiduciary duty concerns. In order for a director to engage meaningfully in business unrelated to his or her corporate role, the director must be allowed to make decisions based on the situation as it exists at the time a given opportunity is presented. Absent such a rule, the corporate fiduciary would be constrained to refrain from exploiting any opportunity for fear of liability based on the occurrence of subsequent events. This state of affairs would unduly restrict officers and directors and would be antithetical to certainty in corporation law.