Corporate officers and directors owe the company a fiduciary duty that prevents them from converting commercial opportunities in which the company has a financial interest and/or expectancy for the officer’s gains to the exclusion of the company. In other words, an officer or director may not redirect the company’s opportunity to themselves. So how is it determined whether the company has a financial “interest and expectancy” in any particular business venture?
In order to give corporate entities security and confidence in the loyalty of their offers and directors, the “interest and expectancy” test is applied broadly. This means that almost any corporate opportunity that the company became aware of, that was of the customary type of business that the company was engaged in, and that the company was or would typically consider as a way to make a profit.
One of several factors that are considered when courts analyze whether the redirected opportunity was one in which the company had an “interest and expectancy” is whether there was a reasonable nexus or relationship between the company’s ordinary type of business operations, on the one hand, and the opportunity that was diverted, on the other hand.
An opportunity is said to be in the corporation’s line of business where the opportunity embraces “an activity as to which [the corporation] has fundamental knowledge, practical experience and ability to pursue, which, logically and naturally, is adaptable to its business, and . . . consonant with its reasonable needs and aspirations for expansion.”
Presently, much of what we are seeing in Texas relating to the usurpation of corporate opportunities in South Texas relates to oil and gas leases and production opportunities, more specifically the Eagle Ford Shale. After a production company invests substantial financial resources (typically by dedicating its employees’ time spent researching and developing the opportunity, but also in third-party vendor expenses to assist in that evaluation and development) to develop geologic information relating to the probability of hydrocarbon production and also the profitability of such production. Additionally, production companies may be required to drill test wells to prove the field’s reserves. Oil and gas production companies only undertake these efforts and expenses because they have an “interest and expectancy” that the company will ultimately make a profit as a result of this endeavor. Production companies would only make such sizeable investments of time and financial resources if they are comfortable that the unfettered sharing of confidential and proprietary information relating to the prospective business venture will not be taken from the company by a self-interested and disloyal officer of the company exploration and development strategies will be free from directors and officers who unilaterally determine to seize exploration and development opportunities for themselves.
Thus, one of the most effective tools available to an E&P Company for protecting valuable research and evaluations concerning oil and gas prospects is the duty of loyalty of those who have gained access to the E&P Company’s intentions or strategies, and the valuable data supporting those intentions and strategies. If fiduciaries are not strictly discouraged from personally capitalizing on such strategies and supporting data, then what was highly valuable to the E&P Company and those that financially invest in such Companies (except those that decide to usurp the strategies and data), becomes practically worthless.
A second factor that is considered by courts evaluating an opportunity that was redirected by a company’s officer or director is whether the company was in such a position that the company substantially needed the redirected opportunity in order to improve it’s dire situation. In other words, if a company is teetering with financial viability, a pending opportunity to make a profit is of much more significance than the same opportunity might be for a company that is better funded and more profitable.
Written By:
Edward Allred
Watts Guerra LLP
4 Dominion Drive, Bldg 3, Suite 100
San Antonio, Texas 78527
Office (210) 447-0500
Mobile (210) 685-1845
eallred@guerrallp.com
© Watts Guerra LLP 2015
