Corporate Opportunities – a distinct and important type of conflict of interest

Recently, the revelation that the CEO of  the beleaguered  energy company Chesapeake also ran a hedge fund which traded in energy products caused a Forbes  journalist to ask if this constituted a violation of the corporate opportunities doctrine: ” The fund was not disclosed to shareholders. Its operation was not undertaken for the benefit of shareholders. Its profits were neither shared with shareholders nor disclosed to shareholders. Why not? It’s not like Chesapeake was a stranger to trading — the company has booked profits of $8.4 billion on its corporate oil and gas hedging in recent years. If the co-founders of the company identified new ways to profit from trading natural gas, why didn’t they present that opportunity to the company instead of keeping it for themselves? This has raised a host of questions. Did they profit off of non-public information about Chesapeake’s trades? Were they front-running? Did the hedge fund pay rent to Chesapeake for being allowed to operate from a Chesapeake building? ” 

The Chesapeake case – which provides many teaching opportunities – gives us occasion to consider this important area of COI about which too little is generally known in the C&E field.

First, what exactly is a “corporate opportunity? According to the American Law Institute’s (ALI) Principles of Corporate Governance,  it is “(1) Any opportunity to engage in a business activity of which a director or senior executive becomes aware, either: (A) In connection with the performance of functions as a director or senior executive, or under circumstances that should reasonably lead the director or senior executive to believe that the person offering the opportunity expects it to be offered to the corporation; or  (B) Through the use of corporate information or property, if the resulting opportunity is one that the director or senior executive should reasonably be expected to believe would be of interest to the corporation; or  2) Any opportunity to engage in a business activity of which a senior executive becomes aware and knows is closely related to a business in which the corporation is engaged or expects to engage.” So, this last part of the definition would seem to fit the Chesapeake case.   

Second, what restrictions govern a director or officer when presented with a corporate opportunity? She may not take the opportunity for herself or a third party unless she first offers it to the corporation and, as part of this offer, make appropriate disclosures to the company’s board of directors.

Third, how do corporate opportunities relate to C&E programs? In 2003, the New York Stock Exchange amended its corporate governance-related listing requirements to include, among other things, a requirement of a code of conduct for directors, officers and employees. Corporate opportunities are among the topics specified for inclusion in such codes.

Fourth, what are the consequences of violating the doctrine?  There can be many – with the most obvious one being suit for damages by shareholders. And consider that not long ago a member of the board of directors of a leading U.S. company was convicted of a securities-law violation in what was essentially a corporate-opportunities case.  Indeed, this case – as well as the whole area of corporate opportunities  – may be worth covering when training directors.  (Note – training directors on COIs will be the subject of our next post.)