A customer offers you a side project. A supplier invites you to invest in a new venture. A property becomes available that your company might want. If you are a director, officer, or LLC manager, taking that deal personally can raise fiduciary-duty concerns. The corporate opportunity doctrine limits when someone responsible for a business may divert an opportunity away from it. This article explains what California businesses and individual owners should consider before pursuing a deal outside the company.
What is the corporate opportunity doctrine?
The corporate opportunity doctrine is part of a fiduciary’s duty of loyalty. It addresses a basic conflict: a person entrusted to act for a company should not use that position to capture a business opportunity that properly belongs to the company.
Not every personal investment or side business violates that duty. The analysis depends on the relationship between the opportunity, the company, and the person pursuing it. An unrelated investment discovered independently presents different concerns from a customer contract offered to someone because they are the company’s president.
California Corporations Code section 309 requires a director to act in good faith, in a manner the director believes to be in the best interests of the corporation and its shareholders, and with the care—including reasonable inquiry—that an ordinarily prudent person in a like position would use under similar circumstances. The corporate opportunity doctrine also draws on fiduciary-duty principles developed through case law. A company’s governing documents matter, but an informal understanding that “everyone can do outside projects” may not resolve a specific conflict.
Who owes duties, and which deals raise concerns?
Directors and officers generally owe fiduciary duties to the corporation. For LLCs, California Corporations Code section 17704.09 defines and limits the statutory duties of loyalty and care. The specified loyalty duties include accounting for property, profits, or benefits derived from appropriating an LLC opportunity, refraining from dealing with the LLC as or on behalf of a party with an adverse interest, and refraining from competing with the LLC in the conduct of its activities. In a member-managed LLC, the statutory duties of loyalty and care generally apply to members. In a manager-managed LLC, those duties generally apply to managers, not to members solely in their capacity as members. However, the statutory obligation of good faith and fair dealing applies to both members and managers, and additional duties may arise from the operating agreement or another relationship.
Ownership alone does not answer every question. Controlling shareholders, employees, and agents may have obligations arising from their role or conduct. An individual’s title, actual authority, and agreements should all be reviewed.
Relevant questions commonly include:
- Business fit: Does the deal fall within the company’s existing activities or reasonably expected expansion?
- Existing interest: Has the company already pursued the deal, negotiated with the seller, or developed a relationship connected to it?
- Source: Did the opportunity arrive through company contacts, confidential information, or the person’s corporate role?
- Resources: Were company staff, funds, equipment, or work time used to identify or develop it?
- Conflict: Would personal participation compete with the company or interfere with duties owed to it?
No single fact necessarily resolves the issue. A company’s current lack of cash, for example, should not be treated as automatic permission to take the deal personally.
Examples of corporate opportunity disputes
Consider a director of a commercial property business who learns through a company broker that a neighboring building is for sale. The company has discussed expansion into that location. Buying the building through a separate personal entity could create a substantial loyalty issue, even if the director supplies all the purchase money.
Similarly, a software company’s officer may receive an offer to develop a product for an existing customer. Calling it a weekend consulting project does not eliminate the conflict if the company provides the same services or the officer uses its code, staff, or customer information.
By contrast, an independently sourced investment in an unrelated industry may present fewer concerns. Still, outside-activity restrictions, confidentiality obligations, and the investment’s effect on company responsibilities need separate review. Whether a deal is a corporate opportunity is not the only legal question.
Disclosure and approval before taking a deal
The safer sequence is to address the conflict before committing to the opportunity. Disclosure after signing a purchase agreement or collecting revenue may leave the company with fewer choices and make meaningful approval harder.
- Pause personal commitments. Avoid moving the opportunity into a separate entity before the company evaluates it.
- Disclose material facts. Explain the source, terms, company connection, expected benefits, and your personal interest.
- Identify the proper decision-makers. Review who has authority to consider the opportunity and which participants have conflicts.
- Obtain legal review. Determine the applicable approval requirements rather than relying on your own vote or informal consent.
- Document the decision. Record what was disclosed, who considered it, and the scope of any authorization.
California Corporations Code section 310 addresses specified contracts or other transactions between a corporation and an interested director or an entity in which a director has a material financial interest. Its disclosure, approval, and fairness provisions do not create blanket authorization to appropriate a corporate opportunity; the corporate-opportunity and fiduciary-duty analysis must also be satisfied. Approval procedures and their legal effect depend on the transaction and governing law. Itkin Law’s corporate governance counsel can help evaluate the process before a personal deal moves forward.
Consequences and practical prevention
A disputed opportunity can lead to claims for breach of fiduciary duty. Depending on the facts, available remedies may include damages, disgorgement of profits, or a constructive trust over property acquired through the breach. These remedies are fact-dependent, not automatic.
Businesses can reduce uncertainty by adopting written conflict-of-interest procedures, requiring timely disclosure, and keeping clear approval records. Founders should also review outside-business provisions when forming the company or bringing in new owners. If a deal has already closed, preserve communications and transaction records, and obtain advice before transferring assets or attempting a retroactive approval.
Talk to a California business attorney
If you are considering a personal deal or questioning an insider’s transaction, a free consultation with Itkin Law can help identify the corporate opportunity issues that need review. Schedule a free consultation or call (424) 603-8888.
This article is attorney advertising and provides general information only. It is not legal advice and does not create an attorney–client relationship. The law changes, and this article reflects the law as of its publication date. Every situation is different — contact us to discuss how the law applies to your exact circumstances. See our full disclaimer.
