Misappropriation of Corporate Opportunities as a Cause of Action in New York

In New York, businesses rely on trust when they place employees or officers in positions to help the company grow. When someone takes a business deal for themselves that the company had a right to pursue, it can lead to a legal claim called misappropriation of corporate opportunity. This claim allows a company to recover losses when an individual uses their position for personal gain rather than for the company’s benefit. The courts in New York use two main ways to decide whether something counts as a corporate opportunity: the essential element test and the tangible expectancy test.

Essential to the Business

One way to identify a corporate opportunity is to ask whether the opportunity was essential to the company’s survival or operations. If missing out on the opportunity could seriously threaten the company’s business model, it is likely to be considered essential. For example, if a manufacturing company depends on access to a rare material and an executive buys exclusive rights to that material for personal use, that would likely qualify. On the other hand, if the company is a real estate broker and has never invested in the properties it sells, then an employee personally investing in one of those properties may not be essential to the company’s business.

Tangible Expectancy

The second way to find a corporate opportunity is to determine whether the company had a real, concrete expectation of getting the deal. This does not require a signed contract, but it must be more than a vague interest or hope. Courts look for a business opportunity that the company was actively pursuing or likely to obtain. For instance, if a company was in negotiations to buy a piece of land, and one of its officers secretly bought it first, that would likely be misappropriation. However, if the third party never would have offered the deal to the company and was only interested in working with the individual, that weakens the claim.

When a Corporate Opportunity Does Not Exist

Even if an employee gains from a deal, it does not automatically mean a corporate opportunity was stolen. If the company was never going to receive the offer or did not have a real interest in it, there may be no case. New York courts have made it clear that an opportunity must belong to the company either because it needed it or expected it in a meaningful way.

Conclusion

Misappropriation of corporate opportunity is a serious claim that protects companies from insiders acting in their own interest. However, not every outside deal qualifies. In New York, courts take a close look at whether the opportunity was essential to the business or whether the business had a real chance of securing it. If neither test is met, the claim will likely fail. These standards help balance loyalty to the company with fair opportunities for individual growth.

Find the Law

“”A corporate opportunity is defined as any property, information, or prospective business dealing in which the corporation has an interest or tangible expectancy or which is essential to its existence or logically and naturally adaptable to its business” (Matter of Greenberg [Madison Cabinet & Interiors], 206 AD2d 963, 964 [1994] [citations omitted]; see Alexander & Alexander of N.Y. v Fritzen, supra; Design Strategies, Inc. v Davis, 384 F Supp 2d 649, 671-675 [2005]). The “tangible expectancy” test and the “essential element” test have been independently defined and applied (see e.g. Alexander & Alexander of N.Y. v Fritzen, supra at 247-248; Design Strategies, Inc. v Davis, supra), but we have yet to determine whether both tests must be met, or whether they are independent, alternate avenues which can be used to identify a corporate opportunity.  . . .

We turn first to the essential element test, as we perceive it to be the easier inquiry on this record. Indeed, defendants have failed to allege that the opportunity to procure an ownership interest in any of the properties they were brokering was “necessary” for or “essential” to its business such that “the consequences of deprivation are so severe as to threaten the viability of the enterprise” (Alexander & Alexander of N.Y. v Fritzen, supra at 248). . . .

A tangible expectancy is “something much less tenable than ownership, but . . . more certain than a desire or hope” (id. at 247-248 [internal quotation marks and citation omitted]; see Blaustein v Pan Am. Petroleum & Transp. Co., 293 NY 281, 300 [1944] [defining tangible expectancy as “a right which in its nature was inchoate”]). . . . . Typically, such evidence that the third party would not have done business with the corporation, but only the employee or officer individually would have, is sufficient to preclude the finding that a corporate opportunity existed (see DiPace v Figueroa, 223 AD2d 949, 952 [1996]).” Moser v Devine Real Estate, Inc. (Florida), 2007 NY Slip Op 06006 [42 AD3d 731] (2007).

“In order for a cause of action for usurpation of corporate opportunity to be a cognizable cause of action, a plaintiff must allege that a corporate fiduciary diverted for his own benefit an opportunity that was an asset of the corporation (Gupta at 446) .” Crowley v. Holly, 2009 N.Y. Slip Op. 32150, 7 (N.Y. Sup. Ct. 2009)