The Corporate Opportunity Doctrine: The Shifting Boundaries of the Duty and its Remedies

AuthorJohn Lowry,Rod Edmunds
DOIhttp://doi.org/10.1111/1468-2230.00160
Date01 July 1998
Published date01 July 1998
The Corporate Opportunity Doctrine: The Shifting
Boundaries of the Duty and its Remedies
John Lowry* and Rod Edmunds**
A central concern for all those actively engaged in the continuing corporate
governance debate is the question of how best to hold the tension between allowing
company directors their entrepreneurial heads whilst ensuring appropriate safe-
guards for the company itself. Take one problem as an illustration. What is the
potential liability of a director who personally pursues a business venture which
corresponds to the line of business of the company in which he or she holds a
directorship? Prominent amongst the equitable devices which it is thought can be
harnessed to good effect in striking an acceptable balance between these
potentially conflicting objectives is what has become known as the ‘corporate
opportunity doctrine’.1Corporate opportunities, though not in the strict sense
assets of the company, are regarded as such, with the consequence that it is not
open to company directors to exploit them for their own personal gain.
In any Anglo-Commonwealth jurisdiction pre-eminence must be given to the
leading House of Lords decision in Regal (Hastings) Ltd vGulliver.2It affirmed
the orthodox position that a strict approach will be taken to the director’s liability
as a corporate fiduciary, a position that has been justified because of a perceived
need to ensure a high degree of protection and deterrence.3A comparison with
foreign law can be instructive and advantageous here, not least for the purpose of
The Modern Law Review Limited 1998 (MLR 61:4, July). Published by Blackwell Publishers,
108 Cowley Road, Oxford OX4 1JF and 350 Main Street, Malden, MA 02148, USA. 515
* Department of Law, Brunel University.
** Centre for Legal Studies, University of Sussex.
We owe a debt of gratitude to James Penner of the LSE, Chris Riley of the University of Newcastle,
Lynden Griggs of the University of Tasmania and to Professor Hugh Collins together with the anonymous
referees for their critical and constructive comments on earlier drafts of this article.
1 Although the precise limits of the doctrine are still regarded as somewhat uncertain, Professor
Prentice describes the core of this American judicial doctrine as a principle which ‘makes it a breach
of fiduciary duty by a director to appropriate for his own benefit an economic opportunity which is
considered to belong rightly to the company which he serves’: D.D. Prentice, ‘The Corporate
Opportunity Doctrine’ (1974) 37 MLR 464. The doctrine now pervades Anglo-Commonwealth
jurisdictions, see for example, Canadian Aero Service Ltd vO’Malley (1973) 40 DLR (3d) 371;
Green vBestobell Industries Pty Ltd (1982) 1 ACLC 1; Paul A Davies (Australia) Pty Ltd (in liq) v
PA Davies (1983) 1 ACLC 1091 and Paul A Davies (Australia) Pty Ltd (in liq) vPA Davies (1982) 1
ACLC 66. See also, Klaus J. Hopt and Gunther Teubner (eds), Corporate Governance and Directors’
Liabilities (Berlin: Water de Gruyeter and Co, 1984); R.P. Austin, ‘Fiduciary Accountability for
Business Opportunities’ in P.D. Finn (ed), Equity and Commercial Relationships (Sydney: Law
Book Company, 1987) 141, 185; R.P. Austin, ‘Moulding the Content of Fiduciary Duties’ in A.J.
Oakley (ed), Trends in Contemporary Trust Law, (Oxford: Clarendon Press, 1996) ch 7; G. Carrad,
‘The Corporate Opportunity Doctrine In Delaware: A Guide To Corporate Planning And
Anticipatory Defensive Measures’ (1977) 2 Del J Corp L 1; Stanley M. Beck, ‘The Saga of Peso
Silver Mines: Corporate Opportunity Reconsidered’ (1971) 49 Can B Rev 80; and, by the same
author, ‘The Quickening of the Fiduciary Obligation’ (1975) 53 Can B Rev 771. See generally, Paul
L. Davies, Gower’s Principles of Modern Company Law (London: Sweet & Maxwell, 6th ed, 1997)
615–622; J.H. Farrar, N.E. Furey, B.M. Hannigan, Farrar’s Company Law (London: Butterworths,
3rd ed, 1991) 422–426.
2 [1942] 1 All ER 378, [1967] 2 AC 134n (hereafter references are to the official report only).
3 See Irving Trust Co vDeutsch 73 F 2d 121, at 124 (1934) per Swan J.
demonstrating how similar problems may receive different judicial responses in
different jurisdictions. The value of such comparative investigation has added
significance in an increasingly globalised world where corporate activity regularly
crosses national boundaries. How to regulate and discourage unacceptable
directorial dealings is not a matter of purely domestic concern. This much is
evident from the growing body of caselaw in Australia, Canada and New Zealand
which deals with the fiduciary responsibilities and liability of company directors.4
Although Anglo-Commonwealth jurisdictions are not responding to the problem in
identical terms, there is a noticeable tendency for judicial and academic activity in
one jurisdiction to refer to developments in other parts of the Commonwealth.
Given the shared legal and cultural heritage within the Commonwealth this is of
course understandable. However, the corporate opportunity doctrine owes much in
its origins to American jurisprudence. That is why it is valuable to take stock of
some of the modern trends in the application by American courts of this pivotal
fiduciary doctrine.
This article considers two recent decisions in the Delaware Supreme Court on the
corporate opportunity doctrine, each of which can be seen as offering neoteric
insights into important aspects of fiduciary principles. Equitable principles continue
to have a profound influence within Delaware, which makes its caselaw on fiduciary
obligations a relevant point of reference for English and Anglo-Commonwealth
lawyers. Our aim is to examine the issues raised by the two Delaware cases against a
broader Anglo-Commonwealth backdrop, thereby assessing them within a
comparative framework. For present purposes there are two significant facets of
the sphere of corporate opportunity that warrant consideration. The first lies in the
flexibility of approach adopted by the Supreme Court towards the determination of
the parameters of fiduciary liability for company directors. The second lies in the
determination of the consequences for losses which flow once such a breach has
been established. We will examine these two separate elements underlying the
operation of the corporate opportunity doctrine in turn.
The parameters of directors’ fiduciary duties
Setting the scene: the Anglo-Commonwealth context
The Delaware approach to establishing whether or not a director has diverted an
opportunity belonging to the company stands in sharp contrast to the more general
approach which has held sway since the landmark decision in Regal (Hastings) Ltd
vGulliver.5It will be recalled that in Regal the four directors who were held to be
fiduciaries were ordered to disgorge the profit they made from the sale of shares
because they had acquired the shares by reason of their positions as directors.6As
such they were found to have exploited a corporate opportunity even though it was
accepted that none of the protagonists had acted in bad faith, they had used their
own money and, significantly, despite the fact that the company was not financially
able to buy the shares itself.7
In reaching what is now regarded as the orthodox stance, the House of Lords
transplanted into the commercial world a mainstay of fiduciary liability which
4 See, for example, the cases mentioned in ns 13, 15 and 16 below.
5 n 2 above.
6 See the speech of Lord Russell of Killowen, n 2 above, 149.
7 See generally, Gower’s Principles Of Modern Company Law, n 1 above, 617.
The Modern Law Review [Vol. 61
516 The Modern Law Review Limited 1998

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