Broz v. Cellular Information Systems, Inc.

Supreme Court of Delaware · 1996 · Corporations

CorporationsCorporate opportunityFiduciary duty of loyaltycorporate opportunityduty of loyaltydirectorGuth testfinancial ability

Facts

Broz was president and sole stockholder of RFBC and also served as an outside director of CIS, a competitor. A broker approached Broz about buying the Michigan-2 cellular license for RFBC, not CIS, because CIS had recently emerged from Chapter 11 and was financially constrained and divesting license holdings rather than acquiring new ones. Broz discussed the opportunity with CIS's CEO and two directors, all of whom indicated CIS was not interested and lacked the ability or inclination to buy it; all CIS directors later testified similarly. Although PriCellular was pursuing an acquisition of CIS and itself became interested in Michigan-2, it had not yet acquired CIS when Broz agreed through RFBC to buy the license.

Issue

Did Broz breach his fiduciary duty to CIS by taking the Michigan-2 opportunity without formally presenting it to the CIS board? More specifically, did the pending but unconsummated acquisition effort by PriCellular require Broz to consider PriCellular's interests as aligned with CIS's when deciding whether the opportunity belonged to CIS?

Rule

A corporate fiduciary may not take for himself 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 reasonable expectancy in it, and taking it would place the fiduciary's self-interest in conflict with the corporation. These factors are guidelines in a fact-intensive equitable inquiry; no single factor is dispositive. Formal presentation of the opportunity to the board is not a per se prerequisite to avoiding liability, though it may provide a safe harbor. The fiduciary's rights are judged based on the circumstances existing when the opportunity arises, without regard to speculative subsequent events, including an unconsummated acquisition by another company.

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

Elena Park owns all of Blue Mesa Transit, a private shuttle company based in Denver, and also sits as an outside director of FrontRange Mobility, a publicly traded regional transport company. A route broker approaches Elena on behalf of Blue Mesa about buying operating rights in western Colorado; FrontRange has recently exited bankruptcy, is barred by lender covenants from new acquisitions without consent, and has been selling routes rather than expanding. Elena informally tells FrontRange's CEO and two directors about the opportunity, and each says FrontRange is not interested.

If FrontRange later sues, which is the strongest argument for Elena under Delaware corporate opportunity law as stated by the majority?

Explanation. The majority held there is no per se Delaware rule requiring formal presentation to the board before a fiduciary may take an opportunity. Formal presentation can provide a safe harbor, but failure to do so does not itself establish usurpation. The inquiry remains fact-intensive under the Guth factors, especially financial ability, interest or expectancy, and conflict.