Friday, April 10, 2009

Virginia Law Regarding Corporate Opportunity: Today Homes, Inc. v. Williams

In Virginia, an officer or director of a company owes, to his or her company, a fiduciary duty not to divert a business opportunity for personal gain.

In other words, if the officer learns about an investment or project (an "opportunity") that would be beneficial to the company, he or she cannot "go behind the company's back" to take advantage of the investment for himself. The legal theory is that the investment -- which in corporate law is known as a "corporate opportunity" -- belongs to the company, not the individual.

In the case of Today Homes, Inc. v. Williams, (the case was decided in 2006, and you can read the decision here) the Supreme Court of Virginia examined a situation where a corporate officer learned about a business opportunity while employed by a corporation but did not take any action to pursue the opportunity until after termination of her employment. In this situation, did the officer violate her fiduciary duty to the company?

The facts:

Today Homes was a real estate developer which focused on building single family homes. Emma Williams was Chesapeake’s vice president of operations. According to the Supreme Court's decision, her responsibilities included purchasing activities and customer service, but not land acquisitions.

While Williams was still employed at Today Homes, a Long and Foster real estate agent told her about land (known as the "Sinclair Property") which had a development plan for a 55 and older adult community. Williams did not think Chesapeake would be interested in the Sinclair Property because Chesapeake was not involved in developing adult communities.

Chesapeake terminated Williams’ employment in March 2003, after which Williams decided to form her own development company, Majestic Homes.

George Woodhouse also worked at Chesapeake. He became Williams's partner in forming Majestic, but Woodhouse remained in Chesapeake’s employment for a couple of months after the formation of Majestic.

After forming Majestic, Williams and Woodhouse contacted the listing agent at Long and Foster and subsequently purchased the Sinclair Property. During the next year, Majestic developed the property and realized almost $4.5 million in gross profit from the sale of homes.

Chesapeake filed suit against Williams, her company Majestic, and her partner, Woodhouse, alleging that they breached their fiduciary duty to Chesapeake by failing to disclose the existence of the Sinclair Property -- in other words, Chesapeake argued that the property was a corporate opportunity belonging to Chesapeake.

The Court's decision:

The first issue addressed by the Supreme Court was whether the real estate was a corporate opportunity for Chesapeake. On this point, the Supreme Court upheld the trial court's determination that the property was, in fact, a corporate opportunity for Chesapeake -- quoting the trial court's finding that "these lots, any lots, were important ... they were, in fact, seeking other business opportunities."

The next question for the Court was whether Williams and/or Woodhouse had breached their fiduciary obligation not to divert the corporate opportunity for their own personal gain. The importance of the Today Homes decision stems from the Supreme Court's distinction between Williams and Woodhouse.

With respect to Williams, the Court stated that while she was an employee of Chesapeake, she had only "casual knowledge" of the property’s existence and had not formed the intent to purchase it. Although a fiduciary obligation can continue after termination of an individual's relationship with a company, in this case the Court found that Williams had no intention of buying the property while still employed; therefore, for Williams the corporate opportunity arose only after she no longer owed a fiduciary duty to Chesapeake (since she'd been terminated).

The Court analyzed Woodhouse's situation differently. He had continued in Chesapeake’s employment and was still an officer during the period of time when he and Williams acquired the property, and for those reasons the Court sent Woodhouse's portion of the case back to the trial court for additional factual determinations.

The Court's distinction between Williams and Woodhouse has come in for some criticism by commentators. With respect to the Court's focus on whether Williams had the "intent" to pursue it is not entirely clear why, from either a legal or practical perspective, the formation of intent (as opposed to the mere knowledge of the opportunity) should be the critical factor in determining whether the officers owes a fiduciary duty to the corporation.

Regardless of whether the analysis with respect to Williams may have been flawed, a significant lesson in Today Homes is its reiteration of the duty of loyalty an officer or director owes to his or her corporation. An individual serving as an officer or director must forgo potential personal opportunities unless disclosure is made and consent is given by the corporation. If (1) a corporate opportunity arises while in such a position and (2) the individual acts on the opportunity, then in all likelihood there will be at least the appearance of -- if not an actual -- breach of one’s fiduciary duty, and the better course of action is to avoid both.