Differentiated Projects, Optimal Contracting, and the Corporate Opportunities Doctrine
The corporate opportunities doctrine (or "COD") regulates when (and whether) a corporate officer or director may usurp new business prospects for her own account without first offering them to the firm. The doctrine -- a subspecies of the fiduciary duty of loyalty -- has been a mainstay of corporations law in most states for over a century. At the same time, however, the COD has always been somewhat murky in its application, and is currently in a state of considerable disarray. In this article, I attempt to clarify this doctrinal quagmire by offering a contractarian account of the doctrine as a default mechanism for allocating intra-firm property rights between parties possessing possibly distinct areas of expertise. Focusing on the information structure of the underlying principal-agent relationship, I demonstrate that both the reach and the consequences of an "optimal" rule depend crucially on the extent to which fiduciaries possess private, unverifiable knowledge about the profitability of new projects. In the presence of such asymmetries, I argue, the optimal COD tends to have a strict liability flavor, imposing damages that need not coincide systematically with the corporation's actual losses. As a consequence, the optimal "second-best" doctrine tends to overdeter fiduciaries from appropriating certain projects, and may even underdeter the appropriation of others.