Broz v. Cellular Information Systems

Supreme Court of Delaware · Corporations

CorporationsCorporate opportunityFiduciary dutyDuty of loyaltycorporate opportunityduty of loyaltydirector fiduciary dutiesline of business

Facts

Broz was president and sole stockholder of RFBC, which operated a Michigan cellular license, and he also served as an outside director of CIS, a competitor. Mackinac, through Daniels, offered the adjacent Michigan-2 license to Broz through RFBC rather than to CIS because CIS had recent financial difficulties after Chapter 11 and was restricted from new acquisitions without creditor approval. Broz discussed his interest in acquiring Michigan-2 with CIS's CEO and other directors, who indicated CIS was not interested and lacked the wherewithal to buy it, and all directors later testified they would not have wanted CIS to pursue it. While PriCellular was attempting to acquire CIS and itself became interested in Michigan-2, it had not yet acquired CIS when Broz agreed to buy Michigan-2 for RFBC.

Issue

Whether Broz breached his fiduciary duty by taking the Michigan-2 opportunity for RFBC without formally presenting it to the CIS board. More specifically, the question was whether a director of a target corporation must consider the interests and plans of a potential acquirer when deciding whether an opportunity belongs to the corporation.

Rule

Under Delaware's corporate opportunity doctrine, a fiduciary may not take an opportunity if the corporation is financially able to exploit it, the opportunity is within the corporation's line of business, the corporation has an interest or expectancy in it, and taking it would place the fiduciary in conflict with corporate duties. These factors are guidelines in a fact-intensive equitable inquiry; no one factor is dispositive, and there is no per se rule requiring formal presentation to the board before the fiduciary may take an opportunity. The fiduciary's conduct is judged ex ante, based on the circumstances existing when the opportunity is presented, and a director of a target or potential target need not consider the interests of a company that has not yet acquired the corporation.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Nina Patel is an outside director of Bay Circuit Holdings, a Delaware corporation based in Phoenix that has been selling off regional fiber assets after emerging from bankruptcy. Nina separately owns Desert Span Networks, and a broker in Denver offers Desert Span a neighboring fiber route because Bay Circuit is subject to loan covenants barring new acquisitions without lender approval. Nina buys the route for Desert Span after two Bay Circuit directors tell her the company cannot finance it and is not pursuing new purchases.

If Bay Circuit sues Nina for usurping a corporate opportunity, which is the strongest argument for Nina under Delaware law as described in the majority opinion?

Explanation. The majority treats the Guth factors as flexible guidelines and places heavy emphasis on the corporation’s financial ability at the time the opportunity is presented. If the corporation is constrained by post-bankruptcy covenants and cannot acquire the asset without creditor approval, that strongly undermines the claim that the opportunity belonged to the corporation. Outside-director status does not eliminate fiduciary duties, receipt in an individual capacity is relevant but not dispositive, and informal discussions are probative but not equivalent to formal board action. (Derived from Broz v. Cellular Information Systems (n.d.).)