de zuniga - Doctrine of corporate opportunity

The doctrine of corporate opportunity means that if the director acquired a business opportunity that should belong to the corporation, he must account to the corporation for all the profits he obtained unless his act was ratified by the stockholders representing at least two-thirds of the outstanding capital stock.  Under such doctrine, a director of the corporation is prohibited from  competing with the business in which the corporation is engaged in, as otherwise, he would be guilty of disloyalty, where profits he may realize will have to go to the corporate funds, except if the disloyal act is ratified (Dean Nilo T. Divina, Questions and Answers on the Revised Corporation Code, p. 238).

The doctrine is embodied in Section 33 of the Revised Corporation Code.  It rests fundamentally on the unfairness, in particular circumstances, of an officer or director taking advantage of an opportunity for his own personal benefit when the interest of the corporation should have been more paramount (ibid.)  And, if, in such circumstances, the interests of the corporation are betrayed,  the corporation may elect to claim all of the benefits of the transaction for itself and the law will impress a trust in favor of the corporation upon the property interest and profits acquired (De Leon, Corporation Code of the Philippines, p. 301).

In a case where the directors of a corporation  cancelled a contract of the corporation for the sale of a foreign firm’s products and after establishing a rival business the directors entered into a new contract themselves with the foreign firm for the sale of the same products, the new contract was regarded as an offshoot of the old contract and the director concerned may not reap the fruits of his misconduct to the exclusion of his principal (De Leon, ibid., citing Gokongwei vs. SEC, 89 SCRA 336).

An amendment to the bylaws of a corporation requiring that a director shall not have substantial interest in another corporation engaged in a business competitive or antagonistic to that of the former was sustained as valid and reasonable.  Certainly, where two corporations are competitive in a substantial sense it would seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the performance of his corporation duties above his personal concerns (ibid.).

In the United States there are two approaches in dealing with corporate opportunity.  Under the Delaware Standard, formal presentment of opportunity, while not required by law, is the prudent course of action to do.  A director may not be regarded as disloyal if he previously offered the opportunity to the corporation.  It creates a kind of “safe harbor” for the director (Herbosa and Recalde, The Revised Corporation Code, p. 161).

On the other hand, the American Law Institute (ALI) focuses on the definition of corporate opportunity, considering the following factors:  the corporation’s line of business, the interest of the corporation in the opportunity, the capacity in which the director discovered the opportunity and the capability of the corporation to take the opportunity (Herbosa and Recalde, ibid.).  Under the ALI approach, if there is corporate opportunity, the focus is on the disclosure to and rejection by the corporation.  A director may not be regarded as disloyal if he previously disclosed and the stakeholders rejected the business opportunity (ibid.).

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The above comments are the personal views of the writer. His email address is dezunigajuan@gmail.com

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