When is there a case of depriving of corporate opportunity?
Previously I addressed the doctrine of corporate opportunity and once again this can be the basis for doubting whether an international group company followed the right policy. The corporate opportunity doctrine is slowly gaining ground in The Netherlands, and remains an interesting talking point. Dutch Corporate lawyer Martijn Kesler explains.
Research into new raw materials
Shareholder A and shareholder B market insulation materials with their (international) group company. They owned various companies that manufactured and sold these materials. To achieve an even more cost-efficient way to organize this ‘commercial chain’, in 2013 shareholder A and shareholder B went to Thailand to conduct research into new raw materials that they use often in the production process.
Dispute between shareholders
During this time, a dispute already existed. Shareholder A accused shareholder B of mismanaging the company and completely taking over control of the company. This dispute eventually resulted in proceedings with the Enterprise Division.
Incorporation own Thai company
During these proceedings it became apparent that shareholder B, separately and indirectly, had incorporate his own Thai company, that supplied the raw materials to (in any case) the group company in which shareholder A and shareholder B had an interest. The managing director of this company turned out to the father of shareholder B’s son-in-law, who knew nothing whatsoever about insulation materials.
Depriving of corporate opportunity
With this bogus scheme, shareholder B held an interest in this Thai company, which is questionable in any case. According to shareholder A this was depriving the company of a business opportunity, i.e. depriving of a corporate opportunity that belonged to the company.
Business opportunities for the company
There is a fine line between business opportunities for entrepreneurs that have to be converted into cash by the company in which they have an interest and opportunities that they can keep to themselves and exploit. The business opportunities for the company are also called ‘corporate opportunities’.
Opportunity has to be in line with the company
In The Netherlands there is not yet a fixed definition of what is or is not a ´corporate opportunity´. This is because the corporate opportunity is originally an American doctrine and has only been used in The Netherlands for some years. There is an agreement in literature that the opportunity has to be in line with the business operated by the company to qualify as a ´corporate opportunity´. However, this also remains a rather vague definition.
Many criteria for defining a corporate opportunity
As stated, this is originally an American doctrine. In America several points of reference are used to define whether or not there is a corporate opportunity. In such an assessment the following is taken into account (i) relationship to the opportunity; (ii) possible future activities of the company; (iii) tangible expectation that the company had in connection to the opportunity; (iv) ability to incorporate the opportunity; (v) importance of the opportunity for the company; (vi) use of the assets of the company; (vii) competition with the company; (viii) capacity of how the information about the opportunity reached the relevant party; (ix) whether the relevant party has been open about the business opportunity for the company. These criteria are weighed and on this basis the determination is made whether this can be considered a corporate opportunity.
Liability for compensation towards the company
If there is a corporate opportunity, this would first have to be ‘released’ by the company i.e. by the general meeting of shareholders, before this could be exploited separately outside the company. If this is not the case, the party concerned is acting wrongfully and is liable for compensation towards the company.
Legal advice from a Dutch corporate lawyer
In this case the defence focuses on the fact that the corporate opportunity was released. Shareholder B’s corporate lawyer stated (in summary) that shareholder A knew about this. However, the question is how this knowledge was created and if there was actually a ‘consultation’. In this matter we have to wait for the investigation report by the Enterprise Division.
Compensation for unlawful conduct
It is important to assess the value of a corporate opportunity as soon as possible. If this corporate opportunity has been appropriated unlawfully, a claim could be filed for surrender of profits as compensation, respectively the transfer of this corporate opportunity. Although corporate opportunity has not yet been clearly defined in The Netherlands, we would advise to use the fully developed criteria that have been used in America for ages. We still have to wait for corporate opportunity to be a completely Dutch doctrine. However, I suspect that this will happen shortly.