Whose opportunity, is it? An introduction to the corporate opportunity doctrine

Simply stated, the corporate opportunity doctrine is a rule which requires disclosure and prohibits a fiduciary from stealing an opportunity from an entity. It prevents a fiduciary from taking advantage of an opportunity related to the entities' business without first offering the opportunity to the entity. This doctrine applies to small businesses as well as large businesses.

While the doctrine itself is not outlined in any of the applicable statutes (the Illinois Business Corporate Act, the Illinois Limited Liability Company Act or the Illinois Uniform Partnership Act), it arises from a fiduciary's duty of loyalty to an entity. Specifically, the requirement that a fiduciary act in the best interest of the entity; and that they deal openly, honestly and in good faith in all dealings with the entity.

In order to be considered an "opportunity" for the Corporate Opportunity Doctrine, the opportunity must be one that is reasonably related to the entities' current business and which the entity is capable of taking advantage of. The opportunity can be: related to a current contract or relationship of the business; related to the purpose of the business; and/or an easy, natural or logical expansion of the business.

When considering if an opportunity existed, the courts will consider the items above as well as: the nature of the opportunity (if harmful or unfair); whether the entity has the financial ability to take advantage of the opportunity; and whether the entity has the knowledge and ability to pursue the opportunity.

It is important to remember that the burden of proving that an "opportunity" existed is on the person who is claiming that the actions taken by the fiduciary were wrong.

However, the courts have repeatedly held that if a fiduciary fails to tell an entity about an opportunity that fiduciary is barred from taking advantage of the opportunity even when the fiduciary reasonably believed that the entity was not capable (or allowed) to take advantage of the opportunity.

The process of disclosing an opportunity to an entity is relatively simple; the fiduciary has to provide the entity with all of the information available to the fiduciary regarding the opportunity and then the remaining disinterested fiduciaries have to review the information and determine whether the entity should pursue the opportunity or not.

Problems arise in small businesses as each of the fiduciaries may want to pursue the opportunity for themselves. This may cause a conflict among the fiduciaries.

Another major issue for small businesses is when the fiduciaries fail to properly observe the corporate formalities while considering an opportunity and fail to properly document the process. A failure such as this often ends up as the basis for a disagreement or lawsuit later. This can arise if the disinterested fiduciaries choose not to pursue an opportunity and it becomes extremely profitable later or if the fiduciaries have a falling out and a disgruntled fiduciary claims that the opportunity was not fully or properly disclosed to the entity.

The basic underlying principal of the corporate opportunity doctrine is that a fiduciary cannot compete with an entity to which they owe a duty of loyalty and that if they wish to compete, they must obtain the permission of the entity prior to doing so.

• For more information, contact Waltz, Palmer & Dawson LLC at (847) 253-8800. Waltz, Palmer & Dawson, LLC is a full-service law firm.