Opinion ID: 1506724
Heading Depth: 1
Heading Rank: 1

Heading: Existence of a Corporate Opportunity

Text: I believe that the trial justice properly denied Armenio's motion for a directed verdict because, after reviewing the plaintiff's evidence in a light most favorable to the plaintiff, the trial justice properly concluded that factual issues remained concerning the existence of a corporate opportunity upon which a reasonable jury could draw different conclusions. A reprise of the pertinent facts shows why this is so. The plaintiff incorporated on September 15, 1981, and acquired a liquor license to operate the previously purchased Pop's Liquors in January 1982. Later that year, in December 1982, the president of the corporation, Custodio, learned that Mendon, the corporation's closest competitor, was for sale. Accordingly he notified Armenio and the other shareholders of this fact during an informal meeting at which they discussed Mendon's availability. Although his authority to pursue this opportunity had not been formally voted upon and duly encapsulated in the minutes of the shareholders' meeting, the evidence was undisputed that Custodio had been authorized by the corporation's other shareholders to negotiate for the corporation's purchase of Mendon in accordance with the informal means by which this close corporation (like so many others of its small size) handled its business affairs. Over the course of the four or five months (December 1982 through March 1983) during which he made five or six telephone calls and had a meeting with one of the owners of Mendon, Custodio kept the other shareholders advised of the status of his inquiries and of Mendon's responses. In his communications with Mendon, Custodio discussed the possibility of the corporation's purchasing it. Moreover, one of the owners of Mendon met with Custodio personally to talk over this potential purchase, and Custodio expected one of Mendon's principals to get back to him with a price and suggested terms. (Custodio testified that he recalled a figure of $122,000 as an offer he might have thrown at them.) Although Custodio was never granted the opportunity to review Mendon's inventory, make a deposit, sign a buy/sell agreement, or examine Mendon's receipts, accounts receivables, gross sales, financial statements, or tax returns, his inability to do so, in retrospect, is hardly surprising, given Caesar's initiation of and involvement in competing negotiations for his own personal account during the same period that Custodio was trying to establish a negotiating beachhead with Mendon on behalf of the corporation. Caesar testified that he first learned of the potential sale of Mendon via a newspaper advertisement in January 1983  one month after Custodio began talking to Mendon's owners at the behest of Armenio and the other shareholders. Caesar stated that after he learned about Mendon's being for sale, he immediately contacted Mendon's owners and began to negotiate to buy the business. These discussions culminated in June 1983 when Act, Inc., then newly incorporated (with Caesar, Armenio, and another person holding equal shares), gave Mendon a firm agreement to purchase. Although the closing did not occur until August 1983, some months after the corporation's last contact with Mendon, it is clear that there was a substantial period (at least from January 1983 through March 1983) during which both the corporation and Caesar, on behalf of what eventually became Act, Inc., were jointly wooing Mendon. Thus Custodio's inability to obtain from Mendon the information he needed to pursue the proposed acquisition might well have been the result of the similar interest expressed by Caesar whose spadework soon resulted in Armenio's participation in the purchase of this business. Moreover, at no time after he authorized Custodio to communicate with Mendon so that the corporation could explore a possible acquisition did Armenio or any of the other shareholders raise any question concerning the corporation's financial ability to purchase Mendon. Indeed, it would have been a most curious circumstance if Armenio and his fellow shareholders had authorized Custodio to negotiate the acquisition on behalf of the corporation if they also believed the corporation would have been unable to buy this competitor in any event. Although the corporation had lost money during its first year of operation and owed its shareholders some money, Custodio testified that the corporation had several financing alternatives to accomplish the proposed Mendon purchase and the owners of Mendon were willing to consider financing such an acquisition themselves. Moreover, in a close corporation environment, it is not just the corporation's assets and credit but those of its shareholders as well that are potentially available to be tapped in the event of a potential acquisition. Thus it ill lies in Armenio's mouth, after authorizing Custodio to try to buy this company for the corporation, to claim that the corporation would nevertheless have been unable to do so and that therefore he was free to participate in usurping this corporate opportunity for himself. On the contrary, having authorized the corporation's president to pursue a corporate opportunity, Armenio did not have the right to determine unilaterally whether the corporation had the ability to purchase Mendon. Rather, a fiduciary who is interested in pursuing an opportunity should not make the decision as to whether the venture is also of interest to the corporation. Instead, to ensure fairness to the corporation, opportunities must be presented to the corporation without regard to possible impediments, and material facts must be fully disclosed, so that the corporation may consider whether and how to address these obstacles.    Without such a rule, the fiduciary's self-interest may cloud his judgment or tempt him to overlook his duties. Demoulas, 677 N.E.2d at 181; see also id. at 179 ([i]n the case of a close corporation, which resembles a partnership, duties of loyalty extend to shareholders [that are]    even stricter than [those] required of directors and shareholders in corporations generally). As we recently stated in Long v. Atlantic PBS, Inc., 681 A.2d 249, 256 n. 8 (R.I.1996), the fiduciary duty owed to a shareholder in a close corporation is one of the most rigorous that the law imposes    `Not honesty alone, but the punctilio of an honor the most sensitive, is    the standard of behavior.' (quoting Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545, 546 (1928) (Cardozo, C.J.)). Here it was up to the corporation and its shareholders  and not to Armenio acting alone or in concert with Caesar or with any other third-party investors  to determine whether any obstacles faced by the corporation in its pursuit of a possible Mendon acquisition were insurmountable. See Demoulas, 677 N.E.2d at 183 (the existence of a legal or other impediment is a matter for a corporation's board to consider when deciding whether to accept or decline an opportunity that has been disclosed to it, and the existence of any impediment does not excuse the failure of a fiduciary to present the opportunity to the board and to disclose all material details before pursuing it himself). Otherwise, shareholders in a close corporation would have carte blanche to take secret steps on their own to capture the opportunity for themselves and then, after the fact, to pooh-pooh the corporation's chances of ever having been able to close on this prospective business opportunity, thereby effectively ensuring that the corporation will be unable to consummate such a transaction. Under this formulation of the law, a close corporation's failure to accomplish any prospective acquisition would tend to be a self-fulfilling prophecy: any shareholders (like Armenio) who might be looking to advance their own personal interests at the expense of the corporation would have a clear field to try and cut their own deals on the sly, thereby frustrating the corporation's prospects for doing so. And if successful, these self-dealing fiduciaries could then turn around and claim that they were at liberty to do so all along because, after all, they reasonably believed the corporation would have been unable to complete such a purchase in any event. Accordingly, after considering this evidence in the light most favorable to plaintiff corporation, without weighing the evidence or evaluating the credibility of the witnesses, and after drawing all reasonable inferences that support the corporation's position, I believe that factual issues remained upon which reasonable persons might draw different conclusions regarding whether a corporate opportunity existed and whether plaintiff corporation had the ability to take advantage of that opportunity. Thus in my opinion Armenio's motion for a directed verdict was properly denied.