Corporate directors as well as employees owe fiduciary duties to the corporation not only to safeguard presently owned business assets, but also “business opportunities.” Since corporate fiduciaries and employees “owe their undivided and unqualified loyalty to the corporation,”[1] they “cannot, without consent, divert and exploit for their own benefit any opportunity that should be deemed an asset of the corporation.”[2] They “may not assume and engage in the promotion of personal interests which are incompatible with the superior interests of their corporation.”[3] This rule applies to other types of business entities, such as limited liability companies and partnerships. The duty not to divert prospective business opportunities may extend even to those opportunities that the corporation is financially unable or otherwise unwilling to undertake.
What is a Corporate Opportunity?
What prospective venture is considered to be a corporate opportunity? Frequently, New York courts utilize the “tangible expectancy test” which evaluates whether the corporation has an “interest” or “tangible expectancy” in the opportunity.[4] However, a “tangible expectancy” is not so easy to define. It has been described as “something much less tenable than ownership, but…more certain than a desire or hope.” Another test utilized in New York is the “line of business test” which assesses whether the opportunity is “the same as or is ‘necessary’ for, or ‘essential’ to, the line of business of the corporation.”[5] Courts have also considered whether, at the beginning of the fiduciary relationship or employment, there was a pre-existing understanding that the fiduciary or employee would pursue ventures in fields related to corporate business.
Some Examples:
A classic theft of corporate opportunity claim is a situation where a corporate officer or director transfers corporate assets to a new corporation that operates in the same business, in order to avoid sharing profits with business partners. In Howard v. Carr, the Third Department affirmed a trial court judgment against a defendant corporate president who took all of the corporation’s “employees, sales associates and customers” and “converted its assets” into a new corporation in order to “avoid sharing profits and proceeds” with his business partner.[6] Similarly, in Greenberg v. Greenberg, the Fourth Department granted a plaintiff shareholder’s motion for summary judgment on a diversion of corporate opportunity claim where it was demonstrated that defendant had:
[U]nilaterally discontinued the business of [the old corporation] after incorporating [the new corporation]; that he appropriated the fixtures and tools of [the old corporation] for use by [the new corporation]; that [the old corporation] occupies the same space that [the new corporation] occupied; and that [the new corporation] does business using the same employees, the identical phone number, and like stationery as that used by [the old corporation].[7]
The diversion of corporate opportunity doctrine also precludes the operation of a competitor business. In Soho Snacks Inc. v. Frangioudakis, the First Department reversed a trial court’s grant of a motion to dismiss by defendant corporate officers and directors who allegedly operated two food cart businesses in lower Manhattan. Those businesses were Soho Snacks Inc. (original corporation) and Unlimited Nuts Inc. (new corporation). A cognizable misappropriation of corporate opportunity claim was found because the defendant corporate officers and directors operated Unlimited Nuts on the same premises as Soho Snacks, thereby diverting prospective business away from Soho Snacks as the original corporation.
Finally, a theft of corporate opportunity extends to unrealized business ventures owed to the corporation. In Yu Han Young v. Chiu, the Second Department affirmed a trial court judgment which held that a defendant who was a corporate officer in two different real estate corporations had misappropriated a corporate opportunity when she established a competing entity and secretly purchased a commercial property in which the old corporations had a “tangible expectancy.”[8] Along the similar lines, in Appell v. L.A.G. Corp., the Supreme Court granted a plaintiff’s motion for summary judgment against his defendant business partners who excluded him from joining in a new, profitable real estate venture.
Thus, the “corporate opportunity doctrine” requires that corporate directors and employees not only secure existing assets and business, but also ensure that prospective opportunities are shared first with the corporation.
Footnotes:
[1] Howard v. Carr, 222 A.D.2d 843, 845 (N.Y. App. Div. 3d Dep’t 1995).
[2] Alexander & Alexander v. Fritzen, 147 A.D.2d 241, 246 (N.Y. App. Div. 1st Dep’t 1989)
[3] Yu Han Young v. Chiu, 49 A.D.3d 535 (N.Y. App. Div. 2d Dep’t 2008) (citing Foley v. D’Agostino, 21 A.D.2d 60, 66 (N.Y. App. Div. 1st Dep’t 1964); see Schachter v. Kulik, 96 A.D.2d 1038, 1039 (N.Y. App. Div. 2d Dep’t 1983).
[4] Id. (citations omitted).
[5] Id. at 248.
[6] Howard, 222 A.D.2d at 845.
[7] Greenberg v. Greenberg, 614 N.Y.S.2d 825, 827 (N.Y. App. Div. 4th Dep’t 1994).
[8] Yu Han Young, 49 A.D.3d 535, 536 (citations omitted).