Opportunity Makes a Thief: Corporate Opportunities as Legal Transplant and Convergence in Corporate Law

Martin Gelter is professor of law at Fordham University School of Law and Genevieve Helleringer is associate professor of law at Oxford University and ESSEC Business School. This post is based on their recent article, forthcoming in the Berkeley Business Law Journal.

We have recently posted our forthcoming article, Opportunity Makes a Thief: Corporate Opportunities as Legal Transplant and Convergence in Corporate Law (forthcoming in the Berkeley Business Law Journal), on SSRN.

The article surveys the corporate opportunities doctrine in four jurisdictions: the US, the UK, Germany, and France. Our analysis enables us to trace the development of the doctrine, exposing the way in which certain models of dealing with a particular issue have arisen, and how these models have then spread. Fiduciary duties are often today held out as typical instruments of shareholder protection in the US and the UK, both of which are often held out as model jurisdictions in corporate governance internationally. However, fiduciary duties in these two jurisdictions often operate in strikingly different ways. While the US relies on an open-ended standard, the UK corporate opportunities doctrine effectively constitutes a rule. Rules and practices regarding the handling of directors’ personal interest in certain business opportunities encompass an economic as well as a moral dimension. Considering the differences in business ethics and corporate culture, it is no surprise that there is a large disparity in these rules and practices in different jurisdictions, especially considering clichéd distinctions between the common law and civil law worlds. The resulting balance may still differ from one jurisdiction to another, depending on the weight accorded to the duty of loyalty of directors.

The UK model developed from the mid-19th century a strict conception based on the figure of the fiduciary and characterized by the no-conflict/no-profit rules. The rules were codified in 2006 and a procedure of ex ante authorization by the board of directors was for the first time introduced at that time. In the end, however, the traditional conception remains entrenched. While the UK model focuses on avoiding conflicts of interest, the US approach aims at identifying the correct owner of the opportunity. After a period of expansion over the course of the 20th century, the doctrine has culminated in a broad conception of fairness, as shown by the most recent important case. This has in practice led to attempts to opt out of the corporate opportunities doctrine, either ex post—by submitting the question to the board—or ex ante—by attempting to eliminate corporate opportunities in the corporate charter, or by specifying what opportunities belong to the corporation. Since corporate opportunities are of particular relevance in closely held firms, this can be seen as a part of the larger trend to contractualize fiduciary duty, which is particularly evident in limited liability companies. We hypothesize that fiduciary duties may have reached a stage of retrenchment in their life cycle.

Our article explores the transplantation of the corporate opportunities doctrine, largely based on the US model, to France and Germany. In Germany, the law historically prohibited officers of the corporation from engaging in competing business activities; the statutory prohibition applied to some but not all corporate opportunities, and also left open some space for the corporate opportunity doctrine to move into. The German version of the doctrine developed gradually over the past fifty years and owes its adoption to a number of academics who studied US law and reinterpreted a number of cases—where it was clear that an officer had violated his duties to the corporation—in light of the newly discovered doctrine. By contrast, it was not until late 2011 that French courts recognized for the first time that a director may not appropriate a corporate opportunity. Until then, self-dealing issues were dealt with under a statutory provision enacted in 1867 merely requiring corporate approval for conflicted transactions, not including corporate opportunities. As the core thesis of the article, we show that there is a considerable degree of convergence relating to the corporate opportunities doctrine, which has radiated primarily from US law to the two civil law jurisdictions. The article compares the treatment of corporate opportunities problem in all four jurisdictions, explores why the US example may have been more attractive as a transplant than the UK model, and discusses possible implications for transplant theory and the debate about convergence in corporate governance.

For the comparative analysis, however, we make the observation that the US corporate opportunity doctrine has been the inspiration for the gradual adoption of the doctrine in Germany and France. In Germany, in particular, the law historically prohibited officers of the corporation from engaging in competing business activities. The statutory prohibition applied to some but not all corporate opportunities and also left open some space for the corporate opportunities doctrine to move into. It owes its adoption to a number of academics who studied the US corporate opportunities doctrine and re-interpreted a number of cases involving officers who violated their duties to their corporations. Through the confluence of judicial and academic developments, the US model of the corporate opportunities doctrine thus became entrenched in German law. French law, which has until very recently hesitated to say that directors owe a duty of loyalty, has moved in a similar direction. Though the exploitation of corporate opportunities is still hardly regulated in France, and cases only deal with managers of small, privately held limited companies, the rules that are emerging encompass the idea of preventing competition to the company’s activities. The reference to the company’s line of business signals an affinity with the US approach and a divide with the UK conception.

The export of the US model possibly signals an element of convergence in corporate law. Our article enables us to tackle a number of questions. First, how can convergence take place on the micro-level of specific legal doctrines? Second, why are systems converging to a particular model (here apparently the US one)? And third, is convergence truly functional, or only formal? Our analysis suggests a complex picture. We can see relatively complete formal convergence in Germany toward the US model, but only a limited level of it in France, where the doctrine has largely been absorbed sub rosa. While we cannot generalize to other Continental European civil law jurisdictions, the no-conflict approach has not been received in the two jurisdictions we have investigated as a structuring principle. The economic macro-fit of the corporate opportunity doctrine may have improved in recent decades in light of changes in these corporate governance systems. Hence, they became more receptive to the doctrine, specifically its US version. However, the two jurisdictions differ in significant ways from each other, as each of them has absorbed the doctrine in its own fashion. On this matter, the dividing line is still between the two common law and the two civil law countries. This finding underlines the complexity of the legal geography. Legal traditions are not blocks that oppose each other but streams able to merge, influence one other and potentially differentiate along the various dimensions of a given issue.

The full article is available for download here.

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