As described in detail in our article on the Corporate Opportunity Doctrine, a fiduciary to a business entity is not normally allowed to utilize a business opportunity that he or she discovers that could be of interest to the company without first offering it to the corporation. To violate this doctrine can result in the fiduciary being personally liable and having to disgorge the profits from the exploitation of the opportunity. In extreme cases, significant damages can be levied against the fiduciary, including punitive damages.
And the reader should review the article on fiduciary duty to recall the pervasive nature of that role which can pertain to officers, employees, directors, managers, attorneys, consultants, brokers, accountants, agents, and many other persons connected with a business by contract and otherwise.
Assuming such a duty exists and an opportunity arises, must the fiduciary forgo all chance to utilize it? No, and the answer, as stated in the article, is both full (preferably written) disclosure, giving the entity the first right of refusal, and doing nothing to interfere with the company’s right to both investigate and objectively consider whether to utilize the opportunity for itself.
Assuming the company forgoes the opportunity, the fiduciary has performed his or her duty correctly and is now free to exploit the opportunity on his or her own.
But the disclosure and procedure for review by the company should be carefully memorialized in writing so that at a later time (especially if the opportunity becomes very favorable) the entity can no longer suddenly change its mind and claim that somehow full disclosure was not made or the company was hindered in its review by actions of the fiduciary.
One example from our practice may help illustrate the danger. A client in business with two friends discovered a technological use for a non-patented piece of software that had not occurred to the other owners and could only be exploited for weapons research. Over a series of dinners, confirmed by rather ambiguous e mails exchanged over the next six months, the other owners indicated that they had neither the money or desire to utilize the technology for such “inappropriate purposes” and told him if he wanted to, go ahead. Four years later, with a million dollar defense contract just signed, the two other owners had a change in mind, claimed that they had not known of the precise method our client had developed, only a variation of it, had not really consented in a formal meeting, and wanted the entire opportunity brought back into the company. They also fired him from his R & D position within the company. That was when he came in to see us for the first time and, of course, the litigation soon arose over what precisely was said to who and when.
We recommend that a variation of the agreement and disclosure below be utilized AND EXECUTED BY ALL OFFICERS AND DIRECTORS of the entity (with the fiduciary abstaining) before the person hoping to exploit the opportunity proceeds to venture into that business. This is only a basic outline and the actual contract should only be prepared with advice of counsel and with as much specificity as possible, but it does give the general approach that is strongly recommended before the opportunity is considered waived.
Note that all sorts of variations can be considered, and it is not uncommon for a fiduciary to offer to license from the company for a specific fee the right to exploit the opportunity or to offer the company a percentage of the income. Whatever is decided…should be put in executed writing. E mails and casual conversations are a very poor substitute.
FORM FOR REJECTION OF OPPORTUNITY BY COMPANY:
BUSINESS OPPORTUNITY DISCLOSURE AND AGREEMENT
This Agreement is both a disclosure of a business opportunity desired to be exploited by ____________________,(hereafter ”Fiduciary”) who occupies the role of ______________ within ____________ (hereafter “Company”) and also acts as an agreement by Company to allow Fiduciary to exploit that opportunity subject to the terms of this Agreement.
ARTICLE I: RECITALS:
1.01 Company is currently in the business of ___________________ and engaged in business in ______________________.
1.02 Fiduciary currently acts as __________ for Company and, as such, has a fiduciary duty in favor of Company. It is the position of Company that part of said fiduciary duty is to provide to Company the first right to exploit any business opportunity that occurs and is known to Fiduciary so long as it is within the field of business currently occupied by Company or reasonably expected to be within the field of business of Company in the foreseeable future. While not necessarily agreeing with said interpretation, Fiduciary, by this disclosure and Agreement, has made full written disclosure of a possible business opportunity (“Opportunity”) so that Company could determine if it wishes to exploit said opportunity.
1.04 Company, independent of the advice and control of Fiduciary, has made its own review of the possible Opportunity as described herein and by this Agreement confirms said disclosure and waives its rights to pursue the Opportunity and grants to Fiduciary the right to exploit the Opportunity for Fiduciary’s own account without further need for approval or disclosure by Fiduciary as more fully explained herein.
ARTICLE 2: DISCLOSURE OF BUSINESS OPPORTUNITY: CONFIDENTIALITY
2.01 Fiduciary has obtained a business opportunity Fiduciary considers of value. Fiduciary, without agreeing that such opportunity must necessarily as a matter of law be granted to Company, hereby describes said opportunity for Company’s review and consideration and agrees that Company has been granted the right to pursue the opportunity to the exclusion of Fiduciary should Company so wish. Without warranting the truthfulness of information provided to Fiduciary by third parties, Fiduciary provides and has provided to Company the information concerning the Opportunity as described herein so that Company may, independent of Fiduciary, determine if Company wishes to pursue the Opportunity instead of Fiduciary. In general terms, and without describing in detail all aspects of the business possibilities, the Opportunity is as follows:
2.02 Company has agreed and hereby agrees to keep such disclosure fully confidential and to only utilize access to the information about the Opportunity to consider whether it wishes to exploit the Opportunity on its own. Should Company not pursue the Opportunity, the information shall be kept strictly confidential by Company as described below. In such event, said information shall be considered Proprietary Information of Fiduciary.
2.03 Proprietary Information herein shall be treated as follows:
(a) For purposes of this Agreement the term "Proprietary Information" means any trade secret or confidential information that the Fiduciary disclosed to Company and which, prior to such disclosure, Fiduciary alone possesses that had been developed or otherwise became known to the Company by disclosure by Fiduciary, which trade secrets and confidential information have commercial value within the scope of the Fiduciary's actual or potential business activities, as conducted or contemplated prior to, concurrent with, or after the date of this Agreement.
(b) "Proprietary Information" includes but is not limited to (i) confidential trade secret and sensitive information the Company receives from Fiduciary, (ii) confidential financial information provided to Company by Fiduciary.
(c) "Proprietary Information" does not include the Fiduciary’s information which:
(i) Company knows at the time of disclosure, free of any obligation to keep it confidential, as evidenced by written records; or
(ii) Is or becomes publicly available through authorized disclosure.
If any portion of any Proprietary Information falls within any of the above exceptions, the remainder of the Proprietary Information shall continue to be subject to the requirements of this Agreement.
(d) All Proprietary Information shall be the sole property of the Fiduciary and its assigns, and the Fiduciary and his or her assigns shall be the sole owner of all patents, copyrights, mask work rights and other rights in connection therewith. Company hereby assigns to the Fiduciary any rights Employee may have or may acquire in such Proprietary Information.
(e) Company agrees that upon termination of its review of the Opportunity, once it elects not to pursue the Opportunity, Company will deliver to Fiduciary all files, documents, data, notes, proposals, records and communications, and all drawings, models, sketches, prototypes or similar visual or conceptual presentations of any type delivered to or developed by Company pursuant to the disclosure of the Opportunity by Fiduciary and all copies or duplicates thereof.
ARTICLE 3: REJECTION BY COMPANY OF OPPORTUNITY
3.01 With Fiduciary abstaining and not participating in the decision making process within Company, Company acknowledges said decision making procedure and hereby declares it has no interest in pursuing the Opportunity and consents to Fiduciary exploiting said Opportunity on his or her own, for his or own account without further need of disclosure or accounting to Company. It is understood that the waiver of the right for this Opportunity is irrevocable by Company and that Fiduciary shall rely on said wavier in making Fiduciary’s own business plans.
3.02 Should the Opportunity result in business not reasonably within the scope of the Opportunity as described herein, such as business in a different field or market than disclosed herein, Fiduciary shall be under an obligation to again disclose to Company the altered opportunity for Company’s possible claim of right. Nevertheless, it is specifically understood that any alteration or expansion of the Opportunity as can reasonably be expected to occur shall remain within the waiver described herein and such reasonable expansion of the business would include likely developments in the technology of the Opportunity and expansion of the market into likely territories.
3.03 Should Fiduciary discover that any material specific information contained in the disclosure was false, Fiduciary shall promptly notify Company of the falsity of the information and Company may reassess its decision to reject the Opportunity for a period of thirty days from date of written notification of the falsity of the information previously disclosed.
ARTICLE 4: ENFORCEMENT AND MISC. PROVISIONS
4.01 (a) No Waiver. Neither the waiver or indulgence by either Party of any of its rights under this Agreement, nor the invalidity of any provisions contained in this Agreement, shall prevent the other Party from enforcing any other provision of or right created by this Agreement.
(b) Availability of Injunctive Relief. If either Party breaches or threatens breach of the provisions of this Agreement, the other Party shall be entitled to an injunction restraining that Party from violating the terms of this Agreement, or from disclosing to any person, firm, corporation, association or other entity any Proprietary Information, including but not limited to that which relates to any ideas, processes, developments, designs, systems, programs, discoveries, inventions, financial information, improvements and writings, referred to herein. Nothing in this Agreement shall be construed as prohibiting the Party from pursuing any other remedies available to it for such breach or threatened breach, including recovery of damages from the other Party.
(c) Modifications. No modification of this Agreement shall be valid unless made in writing and signed by the parties to this Agreement.
(d) Binding Effect. The terms and provisions of this Agreement shall inure to the benefit of the Party’s successors and assigns.
(e) Entire Agreement. This Agreement supersedes and cancels any and all previous agreements of whatever nature with respect to the matters covered in this Agreement.
(f) Cumulative Rights. Every right, power and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right, power and remedy arising out of this Agreement. The exercise of any right, power or remedy shall not be construed as a waiver of the right to exercise at the same time or thereafter any other right, power or remedy.
(g) Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of California.
4.02 Any and all disputes relating to this Agreement or its breach shall be settled by arbitration in _______________, in accordance with the then‑current commercial rules of the American Arbitration Association ("AAA"), and judgment upon the award entered by the arbitrator may be entered in any Court having jurisdiction hereof. Costs of arbitration, including reasonable attorney's fees incurred in arbitration, as determined by the arbitrator, together with reasonable attorney's fees incurred by prevailing Party in Court enforcement of the arbitration award after it is rendered by the arbitrator, must be paid to the prevailing Party by the Party designated by the Arbitrator or Court. Said arbitration shall be conducted in the English language and the award rendered in United States dollars. Service of the Petition to Confirm Arbitration and written notice of the time and place of hearing on the Petition to Confirm the Award of the Arbitrator shall be made in the manner provided herein for all notice. Such service shall be complete on personal delivery or the deposit of the Petition and notice in the United States mail.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first written above.
Of course the form would have to be significantly altered if the company, instead, consents to only a limited use of the opportunity or wishes to participate in some way and, again, legal advice is critical. But the point made in this article is to emphasize that, as with so much of US business, common sense, and fair dealing can normally resolve most problems if careful thought is utilized before a situation deteriorates into confrontation.