What’s the “Corporate Opportunity Doctrine”?

By Bruce Ackerman, Esq.
backerman@pashmanstein.com

In New Jersey, the law imposes certain obligations on all owners, officers and corporate directors.  As a general rule, all such corporate “insiders” as they are called, have a heightened duty of loyalty to the corporation, described as a fiduciary duty.  As part of that fiduciary duty, the New Jersey Supreme Court has imposed a particular duty on such insiders called the “Corporate Opportunity Doctrine”, which restricts all corporate insiders from taking advantage of outside business opportunities while serving the company.  Recently, the New Jersey legislature has provided a unique opportunity to corporations to renounce this doctrine.

In essence, the officers and directors of a corporation have a high duty of loyalty to the corporation and cannot use this position of trust and confidence to further their own interests.   In other words, this duty requires that insiders not profit at the expense of the company they serve, whether by self-dealing or by otherwise diverting company opportunities presented to them.  When found to have violated that duty, the insider can be directed to pay to the corporation all the profits he or she earned from that outside opportunity.

It seems so logical to a business owner to want to restrict the company insiders from taking on these competitive opportunities without first offering them to the company.  However, despite this doctrine guiding the conduct of company insiders in New Jersey for more than 50 years, in 2011 the Legislature chose to allow any corporation to renounce this doctrine and set its insiders free to compete, so to speak.  Why would the Legislature take decisive action to allow any corporation to renounce the doctrine, thereby setting its officers and directors free to compete?  The answer lies in providing flexibility by leveling the playing field between corporations and limited liability companies, by removing a potential disincentive to investing in a New Jersey corporation, and to enhance the ability to attract outside business expertise to join New Jersey companies.

It is commonplace for limited liability companies to provide in the operating agreement that its members, even managing members, may take on any other business opportunity without liability to the LLC.  Until this new law, corporate insiders did not have the right to do the same.  Now, even a smaller company that wants to use the corporate form can have that flexibility by stating its intentions in either its certificate of incorporation or by resolution of its Board of Directors.

That flexibility is often needed on several fronts.  Mostly for mid-size and larger entities, it is often a condition of investment by third parties that they control one or more seats on the corporation’s Board of Directors.  No such investors, or their nominated directors, can permit themselves to be limited in their other business interests by taking on that position.

When a company is seeking outside business expertise to join the company either on its Board of Directors or in another official capacity, the corporate opportunity doctrine may stand in the way.  Rather than having such an obstacle, the Board can remove the application of the doctrine, even if only for a specific outside interest in order to attract a particular expert to assist the company.

Whether to renounce the corporate opportunity doctrine requires a careful analysis of company needs now and in the future.

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