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The Duty of Loyalty and the Law of Corporate Opportunities


It sometimes comes as a surprise to my business clients that a number of legal duties and obligations among business partners and owners aren't found in any contract or written document. I previously blogged about one such duty: the duty of good faith and fair dealing and the law of shareholder oppression. Another major source of law governing the conduct of partners and owners of businesses - and consequently a major source of business litigation - is found in the duty of loyalty and the law of corporate opportunities.

If you operate a business, you're likely to have come across a number of parallel or spin-off type business opportunities. While (some of) these opportunities can be promising, before you go down that path, you have to understand the duty of loyalty and the law of corporate opportunities.

Generally under Oregon law, certain types of business opportunities must be offered to the company you already own before you run off and start a new venture. If you do not, your current company, and your partners, could have a claim against you for appropriating a corporate opportunity.

This particular species of partnership dispute law has been defined by the Oregon Supreme Court as follows:

A director or executive usurps a corporate opportunity if he takes advantage of an economic opportunity without first offering the opportunity to the corporation, disclosing all material facts and obtaining a rejection by a majority of the disinterested directors (or shareholders). See Klinicki v. Lundgren (1985).

 

While it is generally a straight-forward principle, partnership disputes involving the corporate opportunities doctrine are notoriously complex pieces of business litigation. What constitutes full presentation of a business opportunity and an actual or constructive rejection are all very complicated legal and factual issues.

The best strategy when you come up with a new business idea that is related to one you're currently involved in (which I push on all of my business clients): avoid litigation!

Presenting an opportunity, obtaining a rejection, or even cutting a deal with your current partner can be the best play in the long run. The worst-case scenario is going forward with your side business and having your current partners come out of the woodwork (after you've done all the work) and take a big chunk of your hard earned profits.

Although my next recommendation is self-serving, I highly suggest consulting an attorney to advise you on how to move forward with your related venture and how to structure the new business to minimize liability. Careful business or legal planning is, as always, critical.

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