GUIDELINES Delaware courts have established a test for corporate opportunities. If an officer’s self-interest comes into conflict with the corporation’s interest, the duty of loyalty can be breached. The law will not permit an officer to pursue opportunities that: 1. The corporation is financially able to undertake. 2. Are in the line of the corporation’s business. 3. Are of practical advantage to the corporation. On the other hand, if the corporation is not financially able to embrace the opportunity, has no interest in the opportunity, and the officer does not diminish his or her duties to the corporation by exploiting the opportunity, then the person may be allowed to pursue the opportunity. Evidence that the opportunity was presented directly to the individual and then not shared with the corporation may be used to show the corporate opportunity rules were not followed. In most states, the simplest way to avoid a problem is to present the opportunity to the corporation and allow it the chance to pursue or reject it. If the corporation cannot or will not take advantage of the opportunity, the employee, officer, or director may be free to pursue the opportunity. Though formal rejection by the board is not strictly necessary, it is safer for the whole board to reject a corporate opportunity. The decision shouldn’t be based on individual board members’ opinions. There must be a presenta- tion of the opportunity in some form. After the corporation has rejected the opportunity, and before pursuing the opportunity, the employee, officer, or director should unambiguously
disclose that the corporation refused to pursue the opportunity and ensure there is an explanation for the refusal. Resignation before completion of the questionable activity may not constitute a defense to liability arising from a corporate oppor- tunity. Courts have found liability even where officers and directors resigned before the completion of the transaction. Although there are no certain guidelines for determin- ing which opportunities belong to the corporation, controversy and liability may be avoided if officers use rigorous caution regarding corporate opportunities.
new projects without involving every investor?
The key to this issue is clarity. In a real-estate-based LLC operating agreement, be sure it includes state- ments that the principals are free to go after any investment. Although existing investors may be offered the right to invest in future projects (always a good marketing technique), the syndicators must be allowed the freedom to pursue all opportunities for their own account. Check your operating agreement and offering documents to make sure this important language is included. •
Garrett Sutton is a corporate attorney, asset protection expert, and bestselling author in Robert Kiyosaki’s Rich Dad Advisor series. He is the founder of
APPLICATION TO REAL ESTATE
Corporate Direct, which provides affordable LLC and corporate formation services in all 50 states. Sutton has sold more than a million books to guide entrepreneurs and investors. Garrett’s newest book, “Veil Not Fail: Protecting Your Personal Assets from Business Attacks,” is scheduled to publish in July 2022. For more information visit CorporateDirect.com.
But again, what about real estate opportunities? Many syndicators are pursuing several investments at the same time. They always owe a duty to do their best. But does that prevent them from pursuing
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