Business Organizations

NATURE OF CASE: Appeal from a judgment for Cellular Information Systems, Inc. (P) in an action alleging Broz (D) usurped a corporate opportunity.

FACT SUMMARY: Broz (D) utilized a business opportunity for his wholly owned corporation instead of Cellular Information Systems, Inc. (P) for which he served as a member of the board of directors.

RULE OF LAW

The corporate opportunity doctrine is implicated only in cases where the fiduciary’s seizure of an opportunity results in a conflict between the fiduciary’s duties to the corporation and the self-interest of the director as actualized by the exploitation of the opportunity.

FACTS: Broz (D) owned RFB Cellular, Inc. (RFBC), and he also served on the board of directors of Cellular Information Systems, Inc. (CIS) (P), which was a competitor of RFBC. RFBC owned and operated an FCC license area, known as Michigan-4, wherein RFBC provided cellular telephone service to a geographically defined area. Mackinac Cellular Corp. (Mackinac) owned Michigan-2, which was adjacent to Michigan-4. In an effort to divest itself of Michigan-2, Mackinac contacted Broz (D) in his personal capacity to see if RFBC would be interested in purchasing it. CIS (P), which had divested itself of numerous cellular licenses and which had emerged from bankruptcy, was not offered the opportunity to purchase Michigan-2. In addition, Broz (D) informed CIS’s (P) CEO and two of its directors of RFBC’s interest in purchasing Michigan-2, and none of them objected. In fact, they all indicated to Broz (D) that CIS (P) was not interested in Michigan-2. In the meantime, another corporation, PriCellular, was attempting to acquire CIS (P). While Broz (D) was submitting written offers to Mackinac, PriCellular began negotiations with Mackinac to arrange for an option to purchase Michigan-2. The option gave PriCellular the right to purchase at a certain price unless another potential buyer offered at least $500,000 more than that exercise price. CIS’s (P) CEO was aware of PriCellular’s interest in Michigan-2, but nonetheless maintained that CIS (P) was not interested in it. Broz (D) satisfied the option terms (by paying the additional amount) and purchased Michigan-2. Nine days later, PriCellular acquired CIS (P). Afterward, CIS (P) brought suit claiming that Broz (D) had breached his fiduciary duties by usurping for himself (through RFBC) a corporate opportunity that belonged to CIS (P) and that Broz (D) should have formally submitted to the CIS (P) board. The trial court agreed with CIS (P), and the state’s highest court granted review.

ISSUE: Is the corporate opportunity doctrine implicated only in cases where the fiduciary’s seizure of an opportunity results in a conflict between the fiduciary’s duties to the corporation and the self-interest of the director as actualized by the exploitation of the opportunity?

HOLDING AND DECISION: [Judge not stated in casebook excerpt.] Yes. The corporate opportunity doctrine is implicated only in cases where the fiduciary’s seizure of an opportunity results in a conflict between the fiduciary’s duties to the corporation and the self-interest of the director as actualized by the exploitation of the opportunity. Here, the totality of the circumstances indicates that Broz (D) did not usurp an opportunity that properly belonged to CIS (P). Broz (D) was entitled to utilize a corporate opportunity for the benefit of RFBC, his wholly owned corporation, instead of for CIS (P), for which he served as an outside director because: (1) the opportunity became known to him in his individual and not corporate capacity; (2) the opportunity was related more closely to the business conducted by RFBC than to that engaged in by CIS (P); (3) CIS (P) did not have the financial capacity to exploit the opportunity; and (4) CIS (P) was aware of Broz’s (D) potentially conflicting duties toward RFBC and did not object to his actions on RFBC’s behalf. Although the Michigan-2 opportunity was within CIS’s (P) line of business, CIS (P) did not have a cognizable interest or expectancy in the license. Moreover, contrary to the Chancery Court’s determination, Broz (D) was not required to formally reveal the opportunity to CIS (P). Reversed.

ANALYSIS

In Klein and Ramseyer’s hornbook on Business Associations, the authors note that a common argument made by executives accused of usurping corporate opportunities is that the corporation lacked the financial capacity to effectively exploit it. However, courts generally reject this defense unless the defendant has explicitly disclosed the corporate opportunity and the corporation rejects it. This case, however, represents the Delaware view that, if a corporation does not have the financial ability to utilize the opportunity, its financial incapacity will weigh against a court finding that the director was required to offer the opportunity to the corporation.