Scenario 1: You get a call from a long time contact you’d almost forgotten about. He tells about a great business opportunity that could be very lucrative. It’s a deal that might be put through your company because it’s close to the kind of things the company does. And you wouldn’t have even heard about it if you had not been in the position of CEO. But you are thinking of creating a separate company to handle it, one in which you would own 100%.
Scenario 2: You’re negotiating the sale of the company you run and in which you own the vast majority of the stock. You’ve convinced all the minor investors it’s a good deal, but the buyer comes back to you with an even better deal . . . for you. It involves less up-front cash but a bigger earn-out for you personally if the company meets some goals that you are sure you can hit.
These are the topics of two recent articles, Scenario 1 from a law journal (Business Law Today, https://apps.americanbar.org/buslaw/blt/content/2011/08/article-marinello-dean.shtml), and Scenario 2 from a business magazine (The CEO vs. The Shareholder, https://www.inc.com/articles/201110/your-role-as-ceoand-shareholder.html).
If you’re in a hurry and just want the take-away messages from these scenarios, scroll to the bottom of this post.
These scenarios pose problems for you as the leader of your company because you are required to think separately about your own interests and the interests of the other stakeholders in your company. The law says that in any company (except a sole proprietorship) you as leader owe a duty to the company to be loyal to the company first, above your own interests. But that does not mean you can never seek outcomes that favor you. In either of the scenarios presented here–and countless similar ones–the questions you have to ask are:
• Under what circumstances could you take advantage of opportunities that are in your favor even if doing so would present some detriment to the company?
• What procedures would you have to take in order to properly discharge your duties to the company while still taking personal advantage of the opportunities?
The simple answers lie within the rule known as the “Corporate Opportunity Doctrine,” which says basically that before you take personal advantage of opportunities you have to disclose those opportunities to appropriate persons, normally the board of directors, and let the “disinterested” members of that group decide what to do. So, wishing to be squeaky-clean, you decide to follow the simple rule and disclose everything. But to whom? What if there is no formal board of directors, as in the case of an LLC? Are the other owners truly disinterested in these deals? Are lenders included among the parties that need to be notified? What about a non-managing member of your LLC who is entitled to distributions but does not participate in operations? Or a partner’s divorcing spouse, who has a claim to some of the partner’s interests?
In real life, as usual, the answers also depend on a slew of other factors. For example, what exactly are the “ownership” interests of the other investors (LLC members may be treated differently than corporate shareholders); is the company insolvent or nearly so; how close is the opportunity to the company’s line of business; are there restrictions in the company’s articles of incorporation or organization regarding corporate opportunities; do the other owners play a critical role in management or as employees of the company; and of course which state state’s laws apply to your company. Moreover, as you might imagine, there are nuances in the answers to each of these questions that may shift the answers to the larger questions.
But of whom are you going to ask these questions? The two articles cited above give some ideas how some of the questions might be answered in certain situations, but you’re going to need advice for your specific situation.
One thing is certain: You must NOT rely on the company’s lawyer, whose own duty is to his client, the company. The company’s lawyer may try to give you a little advice since it was probably you who hired him the first place. But strictly speaking the rules of legal ethics prohibit the company’s lawyer from telling you anything except that you should get your own lawyer, since in these situations you may be considered an adversary of the company.
So there are two take-away messages if you find yourself confronted with scenarios like these:
1. When opportunities arise that require you to think about your own interests distinct from your company’s interests, you must stop and determine the answers to a lot of questions about how you may proceed.
2. Unless you want to become a legal expert yourself, you need your own personal lawyer to guide you through situations like these.
Argent Place Advisors, LLC is a unique advisory group in that we provide Personal Legal Counsel to help Wealth Creators build upon their success by using the law. If you agree that Personal Legal Counsel could help you create more wealth, please contact Argent Place Advisors to have an exploratory conversation.
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