Scenario 1: You get a call from a long time contact you\u2019d almost forgotten about. He tells about a great\u00a0business opportunity that could be very lucrative. It\u2019s a deal that might be put through your company because\u00a0it\u2019s close to the kind of things the company does. And you wouldn\u2019t have even heard about it if you had not\u00a0been in the position of CEO. But you are thinking of creating a separate company to handle it, one in which\u00a0you would own 100%.<\/p>\n
Scenario 2: You\u2019re negotiating the sale of the company you run and in which you own the vast majority of\u00a0the stock. You\u2019ve convinced all the minor investors it\u2019s a good deal, but the buyer comes back to you with an\u00a0even better deal . . . for you. It involves less up-front cash but a bigger earn-out for you personally if the\u00a0company meets some goals that you are sure you can hit.<\/p>\n
These are the topics of two recent articles, Scenario 1 from a law journal (Business Law Today<\/em>,\u00a0https:\/\/apps.americanbar.org\/buslaw\/blt\/content\/2011\/08\/article-marinello-dean.shtml), and Scenario 2 from a\u00a0business magazine (The CEO vs. The Shareholder<\/em>, https:\/\/www.inc.com\/articles\/201110\/your-role-as-ceoand-shareholder.html).<\/p>\n If you\u2019re in a hurry and just want the take-away messages from these scenarios, scroll to the bottom of this\u00a0post.<\/p>\n These scenarios pose problems for you as the leader of your company because you are required to think\u00a0separately about your own interests and the interests of the other stakeholders in your company. The\u00a0law says that in any company (except a sole proprietorship) you as leader owe a duty to the company to be\u00a0loyal to the company first, above your own interests. But that does not mean you can never seek outcomes\u00a0that favor you. In either of the scenarios presented here\u2013and countless similar ones\u2013the questions you have to\u00a0ask are:<\/p>\n \u2022 Under what circumstances could you take advantage of opportunities that are in your favor even if doing so\u00a0would present some detriment to the company?<\/p>\n \u2022 What procedures would you have to take in order to properly discharge your duties to the company while\u00a0still taking personal advantage of the opportunities?<\/p>\n The simple answers lie within the rule known as the \u201cCorporate Opportunity Doctrine,\u201d which says basically\u00a0that before you take personal advantage of opportunities you have to disclose those opportunities to\u00a0appropriate persons, normally the board of directors, and let the \u201cdisinterested\u201d members of that group\u00a0decide what to do. So, wishing to be squeaky-clean, you decide to follow the simple rule and disclose\u00a0everything. But to whom? What if there is no formal board of directors, as in the case of an LLC? Are the\u00a0other owners truly disinterested in these deals? Are lenders included among the parties that need to be\u00a0notified? What about a non-managing member of your LLC who is entitled to distributions but does not\u00a0participate in operations? Or a partner\u2019s divorcing spouse, who has a claim to some of the partner\u2019s interests?<\/p>\n In real life, as usual, the answers also depend on a slew of other factors. For example, what exactly are the\u00a0\u201cownership\u201d interests of the other investors (LLC members may be treated differently than corporate\u00a0shareholders); is the company insolvent or nearly so; how close is the opportunity to the company\u2019s line of\u00a0business; are there restrictions in the company\u2019s articles of incorporation or organization regarding corporate\u00a0opportunities; do the other owners play a critical role in management or as employees of the company; and of\u00a0course which state state\u2019s laws apply to your company. Moreover, as you might imagine, there are nuances in\u00a0the answers to each of these questions that may shift the answers to the larger questions.<\/p>\n But of whom are you going to ask these questions? The two articles cited above give some ideas how some of\u00a0the questions might be answered in certain situations, but you\u2019re going to need advice for your specific\u00a0situation.<\/p>\n One thing is certain: You must NOT rely on the company\u2019s lawyer, whose own duty is to his client, the\u00a0company. The company\u2019s lawyer may try to give you a little advice since it was probably you who hired him\u00a0the first place. But strictly speaking the rules of legal ethics prohibit the company\u2019s lawyer from telling you\u00a0anything except that you should get your own lawyer, since in these situations you may be considered an\u00a0adversary of the company.<\/p>\n So there are two take-away messages if you find yourself confronted with scenarios like these:<\/p>\n 1. When opportunities arise that require you to think about your own interests distinct from your company\u2019s\u00a0interests, you must stop and determine the answers to a lot of questions about how you may proceed.<\/p>\n 2. Unless you want to become a legal expert yourself, you need your own personal lawyer to guide you\u00a0through situations like these.<\/p>\n Argent Place Advisors, LLC is a unique advisory group in that we provide Personal Legal Counsel to help\u00a0Wealth Creators build upon their success by using the law. If you agree that Personal Legal Counsel could\u00a0help you create more wealth, please contact Argent Place Advisors to have an exploratory conversation.<\/p>\n \u00a9 2011 Argent Place Advisors, LLC<\/p>\n","protected":false},"excerpt":{"rendered":" Scenario 1: You get a call from a long time contact you\u2019d almost forgotten about. He tells about a great\u00a0business opportunity that could be very lucrative. It\u2019s a deal that might be put through your company because\u00a0it\u2019s close to the kind of things the company does. And you wouldn\u2019t have even heard about it if… <\/p>\n