Understanding the corporate opportunity doctrine under the COBE Act

KELVIN SABAO

Introduction

The corporate opportunity doctrine is a longstanding legal principle that governs the fiduciary duties of company officers and directors.

It addresses situations where these individuals, who owe a duty of loyalty to their corporation, come across business opportunities that may be of interest to the corporation.

The corporate opportunity doctrine ensures that company directors act in the best interests of the company and its shareholders.

In this article, I will explore the corporate opportunity doctrine, its application under the COBE Act, and its alignment with Section 55(3)(e) of the Companies and Other Business Entities Act.

 

The corporate opportunity doctrine explained

The corporate opportunity doctrine, often referred to as a subset of the duty of loyalty, essentially states that officers and directors of a company are prohibited from taking advantage of business opportunities that rightfully belong to the company.

This doctrine is rooted in the principle that those in positions of corporate power should prioritize the interests of the corporation over their own personal gain.

The corporate opportunity doctrine is, in essence, a rule of disclosure: When a company’s fiduciary wants to take advantage of an opportunity that is in the company’s line of business, “the fiduciary must first disclose and tender the opportunity” to the company.

The corporate opportunity doctrine precludes fiduciaries from diverting and exploiting for their own benefit any opportunity that should be deemed an asset of the company.

 

Key aspects of the corporate opportunity doctrine include 

Disclosure: Corporate insiders who come across a potential business opportunity must first disclose it to the company’s board of directors.

This disclosure allows the board to assess the opportunity and determine whether the company should pursue it.

Fairness: If the board decides that the company should not pursue the opportunity, the corporate insider cannot personally take advantage of it.

This principle ensures that officers and directors do not unfairly benefit from their positions.

No Competition: Corporate insiders are generally prohibited from directly competing with the company in the same line of business or exploiting the opportunity for personal gain.

Exclusivity: The doctrine also discourages corporate insiders from diverting corporate resources, including time and personnel, for personal gain or the pursuit of personal business opportunities.

Section 55(3)(e) of the Companies and Other Business Entities Act Section 55(3)(e) of the Companies and Other Business Entities Act, which plays a crucial role in the context of the corporate opportunity doctrine, states:

“The duty of loyalty includes but is not limited to a duty not to take business opportunities of the registered business entity for his or her personal benefit, or for the benefit of another person other than the entity.”

This provision aligns with the core principles of the corporate opportunity doctrine and reinforces the duty of loyalty of corporate officers and directors.

By explicitly stating that the duty of loyalty encompasses the prohibition against taking business opportunities for personal benefit or for the benefit of others, section 55(3)(e) emphasizes the need for corporate insiders to act in the best interests of the registered business entity.

 

Conclusion

The corporate opportunity doctrine remains a critical component of corporate governance, and the COBE Act has strengthened its enforcement and accountability mechanisms.

Section 55(3)(e) of the Companies and Other Business Entities Act further reinforces the duty of loyalty by explicitly prohibiting corporate insiders from taking business opportunities for personal benefit or the benefit of others.

Under the COBE Act, officers and directors are expected to act in the best interests of the registered business entity and its shareholders, and violations of the corporate opportunity doctrine can have serious legal consequences. As corporate governance continues to evolve, it is essential for corporate insiders to stay informed about their fiduciary duties and the legal framework governing corporate opportunities.

Disclaimer:

The information and opinions expressed above are for general information only. They are not intended to constitute legal or other professional advice.

Kelvin Sabao is a duly registered legal practitioner practising law at Titan Law. He writes in his personal capacity. He is a co-author of a book titled ‘The Directors’ Handbook in Zimbabwe’. This publication underscores his expertise and dedication to advancing the knowledge and understanding of corporate law and corporate governance in the Zimbabwean context. For more information, you can contact Kelvin via email at: [email protected]

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