Guth v. Loft, Inc.

Supreme Court of Delaware · 1939 · Corporations

CorporationsCorporate opportunityFiduciary dutiesfiduciary dutyduty of loyaltycorporate opportunityconstructive trustself-dealing

Facts

Guth was Loft's president, director, and dominant manager, and Loft operated many retail stores and also manufactured syrups for its own needs. After deciding Loft should replace Coca-Cola with another cola beverage, Guth learned that the Pepsi-Cola formula, trademark, goodwill, and business could be acquired cheaply through Megargel after National Pepsi-Cola Company went into bankruptcy. Guth took the Pepsi-Cola opportunity for himself and Grace, while using Loft's money, materials, facilities, executives, and paid time to develop the enterprise. Loft had the financial ability, plant, personnel, and practical experience to finance and pursue the opportunity itself.

Issue

Whether the Pepsi-Cola opportunity was a corporate opportunity that belonged in equity to Loft, so that Guth, as Loft's president and dominant director, could not appropriate it for himself. Relatedly, the court considered whether Loft could claim the benefits of the transaction because Guth's self-interest conflicted with his duty to the corporation.

Rule

Corporate officers and directors stand in a fiduciary relation to the corporation and may not use their position to further private interests where duty and self-interest conflict. If a business opportunity is one the corporation is financially able to undertake, is in the line of the corporation's business and of practical advantage to it, is one in which the corporation has an interest or reasonable expectancy, and taking it would bring the officer's self-interest into conflict with the corporation's interest, the officer may not seize it for himself; if he does, equity may impose a constructive trust and allow the corporation to claim the benefits.

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Nora Kim is president and a controlling director of Harbor Sweets, a Maryland corporation that runs candy shops in Baltimore and also produces flavored drink syrups for its stores. After deciding the company should stop buying a major lemon-lime concentrate from an outside supplier, Nora learns that the trademark, formula, and distribution contracts for a distressed competing concentrate brand can be bought cheaply; Harbor Sweets has ample cash and production capacity, but Nora buys the brand through her own entity and has Harbor employees spend weeks helping launch it.

If Harbor Sweets sues Nora, which is the strongest argument that the opportunity belonged to the corporation?

Explanation. A corporate fiduciary may not seize for herself an opportunity the corporation is financially able to undertake, that is in its line of business and of practical advantage to it, in which it has an interest or reasonable expectancy, and whose personal appropriation creates a conflict between duty and self-interest. Here Harbor Sweets makes syrups, needs a substitute product for its stores, can afford the acquisition, and Nora used corporate personnel to develop it. Equity may therefore treat the acquired interests and profits as held for the corporation.