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DISLOYALTY
OF A DIRECTOR
Where a director, by virtue of his office, acquires for himself a business opportunity which should
belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must
account to the latter for all such profits by refunding the same, unless his act has been ratified by a
vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital
stock. This provision shall be applicable, notwithstanding the fact that the director risked his own
funds in the venture.
Doctrine of Corporate
Opportunity
• Section 34 is consistent with the duty of loyalty
of a director
• Duty of loyalty mandates that directors should
not give preference to their own personal
amelioration by taking the opportunity
belonging to the corporation
Application of Sec. 34
• If a business opportunity is presented to a director
which:
1. The corporation is financially able to undertake
2. From its nature, is in line with corporations business
and is of practical advantage to it
3. One in which the corporation has an interest or
reasonable expectancy
Application of Sec. 34
• Embracing the opportunity, the self-interest of the
direct will bring conflict with the interests of the
corporation
• Therefore, the law prohibits the director to seize said
opportunity
• No criminal liability however attaches to the director
Prohibition does not apply
• However, prohibition no longer applies after
the resignation of the director
• Or when two related corporations are involved
even if there is interlocking directorship
Tests
• Interest of Expectancy Test
• Line of Business Test
• Fairness Test
• Mixed Test
Interest or Expectancy
• Precludes acquisition by corporate offices of the property of a
business opportunity in which the corporation has a beachhead
• This test is more restrictive and inflexible than the other tests
Line of Business Test
• Where a corporation is engaged in a certain business,
and an opportunity is presented to it embracing an
activity as to which it has knowledge, experience and
ability to pursue, it is said that the opportunity is in line
of the corporation’s business
• Not applicable in our jurisdiction as Directors are not
prohibited from taking part in other corporations with
same lines of business as the ones they are part in.
Unless expressly mentioned in their articles of
incorporation
Fairness Test
• Determines the existence of a opportunity by applying
ethical standards of what is fair and equitable under the
circumstances
• The doctrine of corporate opportunity rests
fundamentally on the unfairness in the particular
circumstances of a director taking advantage of an
opportunity when the interest of the corporation should
have been protected
Mixed Test
• Application of two or all the tests
• It can use both the line of business test and the
fairness test for example
• In our jurisdiction, it is believed that mixed test
can be applied
Burden of Proof
• Burden of proof on the questions of good faith,
fair dealing, and loyalty of the officer lies on the
officer who appropriated the business
opportunity to his own advatange
Profits and Ratification
• A director who acquires profits to the prejudice
of the corporation must account to the latter all
such profits by refunding the same
• The corporation however may choose to ratify
the acts of the director which requires 2/3 of the
outstanding capital stock
Financial Capability
• When the corporation is unable to avail itself of the corporate
opportunity, it becomes a personal opportunity
• It must arise from the financial insolvency or legal restrictions or
any other factor that prevents the corporation from acting upon
the opportunity for its own advantage
• It is necessary for the director to take positive steps to show that
the opportunity was brought to the corporation for its own
decision. Whether or not to avail it.
• Notice therefore must be given to the corporation
• Lack of funds of the corporation is not a defense as it is incumbent
upon the director to raise the necessary funds that the corporation
needs.
• If the court allows this defense, directors may not use their best efforts to
raise revenue
Trustees not covered
• Sec 34 of the Corporation Code specifies onlt the directors as the
persons who are covered by the Doctrine of Corporate Opportunity