Usurpation of Business Opportunity
One business litigation matter our Chicago commercial litigation attorneys have noticed appears quite frequently is the business tort of usurpation of business opportunity. This commercial litigation tort is inextricably interconnected to breach of fiduciary duty principles. In short, it is the fiduciary duty not to usurp a business or corporate opportunity by which only arises by virtue of a fiduciary relationship.
The typical business scenario involves a recognized fiduciary, such as a corporation officer or director, or a member of a limited liability company or a partner in a partnership, diverting a usually lucrative business opportunity for his or her own personal benefit in direct violation of a fiduciary duty of loyalty. The business tort generally arises where a corporate director or officer, a member or manager of a limited liability company, or a partner in a partnership obtains confidential information from a third party and uses that information to divert a prospective economic advantage to himself or herself.
The corporate opportunity doctrine is a disclosure rule, requiring a company’s fiduciary to first disclose any opportunity prior to taking advantage of the opportunity (for himself) that is in the company’s same line of business.
The fiduciary duties owed by officers, directors and shareholders of a company include the obligation to refrain from taking business opportunities that belong to the company. Essentially, the “corporate opportunity doctrine” is a disclosure rule, requiring a company’s fiduciary to first disclose any opportunity prior to taking advantage of the opportunity (for himself) that is in the company’s same line of business. The corporation must first be given the opportunity to decide, with full disclosure, whether or not to take advantage of the particular business opportunity.
For example, corporate officers and directors have duty of loyalty to refrain from purchasing property for themselves if the corporation has an actual or expectant interest in the property or if the purchase would hinder or defeat the corporation’s legitimate business plan or corporate strategy.
The corporate opportunity doctrine is often difficult to apply in small business settings, where corporate formalities are not always observed, where each fiduciary might want the opportunity, where distributional interests might be held by someone other than an owner, or where the company might be close to insolvent.