Document Type

Article

Publication Date

1998

Abstract

Perhaps no single motif permeates corporate law and governance literature like the problem of agency costs.1 Though modest in concept, the canonical principal-agent framework yields fundamental insights into virtually every economic relationship involving the firm. These insights, in turn, not only animate prevailing positive accounts of the modern corporation, but they also provide a normative basis for regulating the oft-lamented gulf between ownership and control.

Despite their pervasiveness, problems of agency costs are rarely more vexing than when an agent is also a potential competitor. A notable example of such a scenario occurs when a corporate manager acquires information about a new business prospect-one which she may be tempted to appropriate for her own personal benefit. In such instances the fiduciary's and shareholders' respective interests are not merely askew, but rather are in profound opposition to one another. Concern over such outright conflict provides the foundation for the "corporate opportunities doctrine" (COD), which is the law's attempt to regulate circumstances in which 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 in the corporations law of virtually every state for well over a century.

In most jurisdictions, COD litigation follows (at least superficially) some variant of the following legal "algorithm": Once a new project is deemed to be a corporate opportunity, a fiduciary may not appropriate it without first offering it to the firm and disclosing her conflict of interest. Pursuit of the project in the absence of full disclosure or without proper rejection from the corporation constitutes a breach of fiduciary duty, carrying rather formidable repercussions: The firm may obtain injunctive relief (if feasible), disgorgement of the fiduciary's gains, and even punitive damages.

Regrettably, this doctrinal algorithm has proven as unwieldy in application as it is concise in recitation. Courts have struggled mightily over the years to formulate precise definitions of "corporate opportunity," "full disclosure," and "proper rejection." Repeated endeavors by litigants, judges, and legal scholars to clarify the doctrine have generated a panoply of tests, variations, and hybrids. But the end product of this collective effort appears by virtually all accounts-more tautologous than diagnostic, replete with exceptions and indecipherable distinctions that provide little guidance either to theorists or to practitioners.2

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