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Key11 Carpe diem, but not the opportunity

Because directors are fiduciaries, they are not permitted to capitalize on business opportunities that come their way that might interest the corporation. For example, a director on the board of Scott Paper would need to share with the board of Scott an opportunity for acquisition of land for logging. As explained in Key 9, Loft’s had the right to look at Pepsi as a business opportunity before one of its directors, Charles Guth, took it for his own.

But the results of following that rule are not always beneficial to the company. Former Arizona governor J. Fife Symington used the corporate opportunity doctrine in his defense in a savings and loan case. Southwest Savings loaned money to the governor’s development firm (a business he ran before being elected) while the governor was a member of the Southwest Savings & Loan board. Allegations of conflict of interest were raised about Mr. Symington’s dual role as debtor and board member. But Mr. Symington defended himself successfully on the grounds that as a director of Southwest he had a responsibility to present the loan opportunity to the board of Southwest before taking it elsewhere. That the loans went bad did not mean they were not a corporate opportunity at the outset. Mr. Symington argued persuasively that the failure to present the opportunity for the loans to his development company to the Southwest Savings board would have been a violation on his part of the corporate opportunity doctrine.

When a director is presented with an opportunity related to the corporation’s business, the director must take three steps:

• The opportunity must be presented to the board.
• The board must affirmatively reject the opportunity. (“Affirmatively reject” sounds like doublespeak but simply means that the board actually takes action to reject the opportunity rather than just tabling the issue.)
• The director must indicate his or her intent to take the opportunity.

If the director does not take these three steps, then any profits the director makes pursuing the opportunity belong to the corporation. A corporate opportunity belongs first of all to the corporation and not to its directors.