Usurping Corporate Opportunities in Minnesota

What counts as a corporate opportunity in Minnesota?

The corporate opportunity doctrine bars an insider from taking a corporate opportunity for personal benefit. A corporate opportunity in Minnesota is a business opportunity “of sufficient importance and is so closely related to the existing or prospective activity of the corporation as to warrant judicial sanctions against its personal acquisition by a managing officer or director of the corporation,” under Miller. Courts answer that question with a flexible line-of-business test.

Miller told courts to look at all the facts, with these as “the most significant”:

1. Whether the company “has an interest or an expectancy growing out of an existing contractual right.”
2. How the opportunity relates to the company’s purposes and current activities, “whether essential, necessary, or merely desirable to its reasonable needs and aspirations.”
3. Whether the opportunity falls in areas “into which the corporation might easily, naturally, or logically expand.”
4. Whether the opportunity is competitive, meaning “prospectively harmful or unfair.”
5. Whether the company has the financial ability to acquire it.
6. Whether the company has “fundamental knowledge, practical experience, facilities, equipment, personnel, and the ability to pursue” it.

Miller also addressed the company’s charter: “The fact that the opportunity is not within the scope of the corporation’s powers, while a factor to be considered, should not be determinative, especially where the corporate fiduciary dominates the board of directors or is the majority shareholder.” When the facts are disputed, the question is one of fact “with the burden of proof resting upon the party attacking the acquisition.” The co-owner bringing the claim proves this first step.

Who owes the duty not to take a company’s opportunity?

The duty falls on the people who run the company: directors and officers of a corporation, the members of a member-managed LLC, the managers or governors of other LLCs, and general partners. Shareholders of a closely held corporation also owe one another a statutory duty to act honestly, fairly, and reasonably, and an LLC member who does not manage owes no fiduciary duty solely because of that membership.

• Directors and officers. Miller describes “one entrusted with the active management of a corporation, such as an officer or director.” By statute, each must act “in good faith, in a manner the director reasonably believes to be in the best interests of the corporation,” under Minn. Stat. § 302A.251, subd. 1, and officers carry the same standard under Minn. Stat. § 302A.361, subd. 1.
• Shareholders of a closely held corporation. Minn. Stat. § 302A.751, subd. 3a, refers to “the duty which all shareholders in a closely held corporation owe one another to act in an honest, fair, and reasonable manner in the operation of the corporation.” In Pedro v. Pedro, 489 N.W.2d 798 (Minn. App. 1992), a family-company case, the court said: “Shareholders in closely held corporations owe one another a fiduciary duty.”
• LLC members, managers, and governors. In a member-managed LLC, each member owes “the fiduciary duties of loyalty and care,” under Minn. Stat. § 322C.0409, subd. 1. In a manager-managed LLC those duties apply “to the manager or managers and not the members,” and “A member does not have any fiduciary duty to the company or to any other member solely by reason of being a member” (subd. 7). In a board-managed LLC they apply “to the governors and not the members” (subd. 8). The details are on my page about fiduciary duties in a Minnesota LLC.
• General partners. Each partner owes the partnership a duty of loyalty under Minn. Stat. § 323A.0404.

The two Minnesota Supreme Court decisions on the doctrine itself, Miller and A. C. Petters, both involved family companies. In Miller, brothers ran a waste business their father founded; in A. C. Petters, a nephew had taken over his uncle’s gravel company. When the owners are spouses, a divorce adds its own property questions, covered in who gets the business in a divorce.

How does the Miller two-step test decide liability?

Once a court finds the opportunity was the company’s, step two asks whether the insider who took it still met “his fiduciary duties of loyalty, good faith, and fair dealing toward the corporation.” The insider, not the company, carries that burden.

Miller put it plainly: “The burden of proof on the questions of good faith, fair dealing, and loyalty of the officer to the corporation should rest upon the officer who appropriated the business opportunity for his own advantage.” The court gave two reasons: “a fiduciary with a conflict of interest should be required to justify his actions,” and the facts “are more apt to be within his knowledge.”

The factors the court weighs at step two are “the nature of the officer’s relationship to the management and control of the corporation; whether the opportunity was presented to him in his official or individual capacity; his prior disclosure of the opportunity to the board of directors or shareholders and their response; whether or not he used or exploited corporate facilities, assets, or personnel in acquiring the opportunity; whether his acquisition harmed or benefited the corporation,” along with every other fact bearing on good faith.

The court added two limits. It was not suggesting “that a finding of bad faith is essential to impose liability upon the acquiring officer. Nor, conversely, that good faith alone, apart from the officer’s fiduciary duty requiring loyalty and fair dealing toward the corporation, will absolve him from liability.” And at the far end, taking an opportunity “clearly essential to the continuance of a corporation or so intimately related to its activities as to amount to a direct interference with its existing activities would negate any attempt by the officer to prove his good faith, loyalty, and fair dealing.” An insider who takes the deal has a personal stake in it, the kind of conflict of interest that explains why Miller puts the burden on the insider.

What is the business judgment rule, and does it protect an insider who takes an opportunity?

The business judgment rule is a court-made rule of deference: when disinterested directors make an informed decision in good faith, a court will not second-guess it, and the directors are not personally liable if the decision loses money. That protection does not help an insider who took a company opportunity personally, because that insider is not disinterested in the deal.

In Janssen v. Best & Flanagan, 662 N.W.2d 876 (Minn. 2003), the Minnesota Supreme Court explained that courts established “a ‘business judgment rule’ that grants a degree of deference to the decisions of corporate directors.” The court quoted the standard definition: “The business judgment rule is a presumption protecting conduct by directors that can be attributed to any rational business purpose.” It then described what the rule means: “as long as the disinterested director(s) made an informed business decision, in good faith, without an abuse of discretion, he or she will not be liable for corporate losses resulting from his or her decision.” One reason the court gave is that “courts are ill-equipped to judge the wisdom of business ventures.” Janssen applied the rule to a special litigation committee’s decision about a derivative suit.

The director standard in § 302A.251, subd. 1, quoted above, reflects the same idea. Minnesota’s LLC Act names the rule outright: an LLC member’s duty of care is “Subject to the business judgment rule,” under Minn. Stat. § 322C.0409, subd. 3.

For a usurpation claim, the difference matters. The rule’s deference runs to disinterested directors, while Miller places the burden of proving good faith, loyalty, and fair dealing on the officer who took the opportunity. If you are the insider, you should expect to prove your conduct was fair rather than rely on a presumption. How the rule works for ordinary board decisions is covered in how the business judgment rule protects directors and officers.

When is a business opportunity not the company’s?

A business opportunity is not the company’s when it has no reasonable connection to the company’s current or planned business, or when the company lacks the money or the practical ability to take it. In either case the insider may take it without liability, absent fraud or another breach of duty.

Miller held that if the undisputed facts show the opportunity “bears no logical or reasonable relation to the existing or prospective business activities of the corporation or that it lacks either the financial or fundamental practical or technical ability to pursue it, then such opportunity would have to be found to be noncorporate as a matter of law.” In Miller itself, the brothers who ran a waste mill built two plastics companies. “The development and manufacture of both plastic compounds required the skill and supervision of trained chemists,” and the mill had no “facilities, equipment, capacity, or technical knowledge” to engage in such businesses. The Minnesota Supreme Court upheld the trial court’s findings that those businesses were not in the mill’s line of business.

The company’s financial inability is a recognized defense. In A. C. Petters Co. v. St. Cloud Enterprises, Inc., 222 N.W.2d 83 (Minn. 1974), the officers bought land next to the company’s gravel pit after the company’s bank refused more credit. The court held that “the undisputed testimony conclusively establishes that the company was financially unable to avail itself of the business opportunity,” so the land was not a corporate opportunity. It added: “It is a universal common-law rule that a corporate officer has no specific duty to use or pledge his personal funds to enable the corporation to take advantage of a business opportunity.” Because these are the defenses the cases recognize, a co-owner should gather the company’s financial records and business plans from the period to test them.

How do Minnesota’s LLC and partnership statutes treat company opportunities?

Minnesota’s LLC and partnership statutes write the duty into law. A member of a member-managed LLC, and the managers or governors of other LLCs, must account for and hold as trustee any benefit from “the appropriation of a limited liability company opportunity”, and a general partner must do the same for “the appropriation of a partnership opportunity”.

Under Minn. Stat. § 322C.0409, subd. 2, the duty of loyalty includes the duty “to account to the company and to hold as trustee for it any property, profit, or benefit derived by the member,” including a benefit derived “from the appropriation of a limited liability company opportunity”. It also includes the duty “to refrain from competing with the company in the conduct of the company’s activities before the dissolution of the company.” For managers of a manager-managed LLC and governors of a board-managed LLC, subdivisions 7 and 8 add: “The duty stated under subdivision 2, clause (3), continues until winding up is completed.” Subdivision 4 adds a duty for every member, whatever the management structure: to act “consistently with the contractual obligation of good faith and fair dealing, including acting in a manner, in light of the operating agreement, that is honest, fair, and reasonable.”

For general partnerships, Minn. Stat. § 323A.0404 imposes the duty “to account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity”. The same section says “A partner does not violate a duty or obligation under this chapter or under the partnership agreement merely because the partner’s conduct furthers the partner’s own interest.” The breach is taking an opportunity that belongs to the partnership.

How does Minnesota decide whether an opportunity belongs to a partnership?

Chapter 323A makes appropriating “a partnership opportunity” a breach of loyalty. In Triple Five, a federal court of appeals applying Minnesota law decided whether an opportunity was the partnership’s with the same line-of-business factors Miller uses for corporations. That one federal decision is persuasive, not binding, on Minnesota state courts.

In Triple Five of Minnesota, Inc. v. Simon, 404 F.3d 1088 (8th Cir. 2005), a dispute between the partners that owned an interest in the Mall of America, the federal court of appeals applied Minnesota law and cited Miller: “A partner may not appropriate a business opportunity which rightly belongs to the partnership.” It continued: “An opportunity that is closely related to the entity’s existing or prospective line of business, would competitively advantage the partnership, and is one that the partnership has the financial ability, knowledge and experience to pursue is a partnership opportunity.” The court added that “The determination of whether an opportunity rightly belongs to the partnership is necessarily one of fact,” and that financial ability “is one of several factors to be considered, but is not completely dispositive.” The decision rests on Miller.

Triple Five also rejected a managing partner’s argument that the deal was not a partnership opportunity because the managing partner had declined it for the partnership: “While it may have been within the managing partner’s prerogative to make such a call, that same managing partner may not then divert its attention and partnership resources toward obtaining that partnership opportunity for itself, through use of an alter ego.” The court affirmed the liability findings and sent the remedies back to the trial court. If you are a partner, the practical lesson is that a decline by the partner who wants the deal is not a disclosure to, or approval by, the other partners.

How does partnership law on opportunity misuse vary by state?

States differ less on whether a partner may take a partnership opportunity than on how far a partnership agreement can change that duty. Which state’s law applies depends on where the partnership is run: under Minn. Stat. § 323A.0106(a), “the law of the jurisdiction in which a partnership has its chief executive office governs relations among the partners and between the partners and the partnership,” subject to a separate rule for limited liability partnerships in subsection (b).

Minnesota sets a fixed floor. Under Minn. Stat. § 323A.0404(a), “The only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care,” and a partner’s duty of loyalty “is limited to the following”, a list that includes the appropriation of a partnership opportunity. A Minnesota partnership agreement may narrow that duty by identifying permitted activities, but under Minn. Stat. § 323A.0103(b)(3) it may not “eliminate the duty of loyalty under section 323A.0404(b) or 323A.0603(b)(3)”.

Delaware’s statute goes further. It states, “It is the policy of this chapter to give maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements,” under Del. Code Ann. tit. 6, § 15-103(d). Under § 15-103(f), “A partnership agreement may provide for the limitation or elimination of any and all liabilities for breach of contract and breach of duties (including fiduciary duties) of a partner or other person to a partnership or to another partner.” The one exception is liability for “a bad faith violation of the implied contractual covenant of good faith and fair dealing.” If a partnership’s chief executive office is outside Minnesota, I suggest the partners check that state’s statute and their agreement before assuming Minnesota’s floor applies, because another state may let the agreement remove duties Minnesota keeps.

Can someone who is not a partner be liable for helping divert an opportunity?

Yes. An outsider who knowingly helps a partner or other fiduciary take an opportunity can be liable for aiding and abetting the breach, and an affiliate controlled by the fiduciary can be held to the fiduciary’s duty.

In Witzman v. Lehrman, Lehrman & Flom, 601 N.W.2d 179 (Minn. 1999), the Minnesota Supreme Court set out the elements: “(1) the primary tort-feasor must commit a tort that causes an injury to the plaintiff; (2) the defendant must know that the primary tort-feasor’s conduct constitutes a breach of duty; and (3) the defendant must substantially assist or encourage the primary tort-feasor in the achievement of the breach.” Knowledge and assistance are weighed together: “where there is a minimal showing of substantial assistance, a greater showing of scienter is required.” The claim failed in Witzman itself. The allegations did not show that the trustee’s longtime accountants had “actual knowledge” that he was engaging in tortious conduct. The court also noted that most courts treat “substantial assistance” as “something more than the provision of routine professional services.” In Leiendecker v. Asian Women United of Minnesota, 848 N.W.2d 224 (Minn. 2014), the court described aiding and abetting as not “independently actionable” but as a theory that makes a defendant liable for the underlying wrong, so the helper is liable only if the underlying breach is proved.

Triple Five shows the second route. The buyer of the diverted interest was a publicly traded company, not a partner, but the court found that “its day-to-day decisions were being made by the same people who were decision-makers at” the managing partner, and held that both owed “a duty of integrity and good faith to Triple Five in this particular transaction.” If you suspect a diversion, I suggest finding out who ended up with the deal, because a new company owned by the partner, a relative, or a buyer who knew the deal came from the partnership may share the liability.

Can partners settle an opportunity dispute outside of court?

Yes. Partners can resolve a diverted-opportunity dispute by agreement at any time, before or after a lawsuit starts. Ratification is one form of settlement: the partners may approve the act after full disclosure of all material facts, as described under how an owner can pursue an opportunity the company does not want.

Once a suit is filed, the court rules require the parties to address alternative dispute resolution (ADR), and mediation is one of the ADR processes the rules list. Under Minn. Gen. R. Prac. 114.01(a), “All civil and family cases are subject to this rule,” with listed exceptions. Under Rule 114.04(b), “The parties, after service of the complaint, petition, or motion, shall promptly confer regarding selection and timing of the ADR process and selection of a Neutral.” If the parties cannot agree on a process, “the court shall order the parties to use a non-binding ADR process.” A partner’s own claim under § 323A.0405 is brought in the partner’s name, unlike the shareholder derivative action discussed below, where Rule 23.09 requires court approval to settle.

A written settlement should say who keeps the opportunity or its profits, whether the partner who took it pays the partnership or buys out the others, and what release each side gives. Because the statute conditions ratification on “full disclosure of all material facts,” the settlement should rest on a written disclosure of the deal’s terms.

How can an owner pursue an opportunity the company does not want?

In an LLC or general partnership, an owner can pursue an opportunity after “full disclosure of all material facts” and authorization by all of the members or all of the partners, unless the governing agreement sets another method. For a corporation, Miller weighs the insider’s disclosure and the company’s response as one factor, not as an authorization.

• LLCs. “All of the members of a member-managed limited liability company or a manager-managed limited liability company may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty,” under Minn. Stat. § 322C.0409, subd. 6. The operating agreement may instead set a method for approval “by one or more disinterested and independent persons after full disclosure of all material facts,” under Minn. Stat. § 322C.0110, subd. 5.
• Partnerships. “All of the partners or a number or percentage specified in the partnership agreement may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty,” under Minn. Stat. § 323A.0103(b)(3)(ii).
• Corporations. Chapter 302A has no section on approving a corporate opportunity. Miller lists the officer’s “prior disclosure of the opportunity to the board of directors or shareholders and their response” as a factor. The Miller brothers avoided liability in part because they acted “after full disclosure to and with the acquiescence, if not the approval, of all the then officers and shareholders.”

In any entity type, I suggest that an owner who learns of an opportunity through the business present it to the company before taking it personally. I suggest this because the LLC and partnership statutes condition approval on full disclosure, and Miller weighs disclosure for a corporation. I also suggest putting the disclosure in writing, describing the deal’s terms, and recording the company’s decision in minutes or a written consent, because that record speaks directly to the disclosure-and-response factor Miller weighs at step two.

What remedies does a Minnesota co-owner have?

The main remedy is to make the insider give the opportunity and its profits to the company. Miller states that when an opportunity “is usurped for personal gain,” “the opportunity and any property or profit acquired becomes subject to a constructive trust for the benefit of the corporation.” The LLC and partnership statutes reach the same result by making the insider “hold as trustee” any benefit.

A constructive trust reaches the opportunity itself and any property or profit the insider acquired through it. Statutes add other relief:

1. Equitable relief and fees for a chapter 302A violation. Under Minn. Stat. § 302A.467, “If a corporation or an officer or director of the corporation violates a provision of this chapter, a court in this state may, in an action brought by a shareholder of the corporation, grant any equitable relief it deems just and reasonable in the circumstances and award expenses, including attorneys’ fees and disbursements, to the shareholder.”
2. Relief for shareholders of a closely held corporation. Minn. Stat. § 302A.751, subd. 1, lets a court grant equitable relief or dissolve the corporation in listed situations. Two of them are when those in control acted “in a manner unfairly prejudicial toward one or more shareholders” and when “the corporate assets are being misapplied or wasted”. Under subdivision 2, the court may order one side to buy the other out “if the court determines in its discretion that an order would be fair and equitable to all parties under all of the circumstances of the case.” If the bylaws or a shareholder agreement already set a price for the shares, “the court shall order the sale for the price and on the terms set forth in them, unless the court determines that the price or terms are unreasonable under all the circumstances of the case.” Under subdivision 4, a party who “acted arbitrarily, vexatiously, or otherwise not in good faith” can be ordered to pay the others’ reasonable expenses, including attorneys’ fees. A buyout is often where these disputes end, as explained in buyouts in family business disputes.

A corporation’s articles may limit a director’s personal liability for money damages, but under Minn. Stat. § 302A.251, subd. 4, the articles “shall not eliminate or limit the liability of a director” in listed cases. Those cases include liability “for any breach of the director’s duty of loyalty to the corporation or its shareholders” and “for any transaction from which the director derived an improper personal benefit”. An LLC operating agreement may limit liability for money damages, but not for a “breach of the duty of loyalty”, under Minn. Stat. § 322C.0110, subd. 7.

How does a co-owner bring a usurpation claim?

Because the opportunity belonged to the company, the claim in a corporation or LLC usually belongs to the company too, so a shareholder or member typically sues on the company’s behalf in a derivative action. A shareholder of a closely held corporation may also sue in the shareholder’s own name under § 302A.751, and an LLC member may sue directly only for an injury that is not solely the company’s.

The procedural steps depend on the entity:

1. Corporations. Minn. R. Civ. P. 23.09 requires the complaint to “allege that the plaintiff was a shareholder or member at the time of the transaction of which the plaintiff complains or that the plaintiff’s share or membership thereafter devolved on the plaintiff by operation of law.” The complaint must also “allege with particularity the efforts, if any, made by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members, and the reasons for the plaintiff’s failure to obtain the action or for not making the effort.” The rule also provides that “The action shall not be dismissed or compromised without the approval of the court”. Miller itself was a derivative action brought by a minority shareholder.
2. LLCs. Under Minn. Stat. § 322C.0902, a member may sue derivatively after asking those who manage the company (the other members, the managers, or the board of governors) to have the company bring the action. The member may sue if they do not “bring the action within a reasonable time”. A member may also sue without that demand if “a demand under clause (1) would be futile.” A direct action is available under Minn. Stat. § 322C.0901, subd. 1, but under subdivision 2 the member “must plead and prove an actual or threatened injury that is not solely the result of an injury suffered or threatened to be suffered by the limited liability company.”
3. Closely held corporations. The shareholder can pair the opportunity claim with a claim under Minn. Stat. § 302A.751, subd. 1, discussed on my page on shareholder oppression claims.
4. General partnerships. Under Minn. Stat. § 323A.0405, “A partnership may maintain an action against a partner for a breach of the partnership agreement, or for the violation of a duty to the partnership, causing harm to the partnership,” and “A partner may maintain an action against the partnership or another partner for legal or equitable relief, with or without an accounting as to partnership business,” including to enforce “the partner’s rights under section 323A.0401, 323A.0403, or 323A.0404”.

On the merits, the Minnesota Court of Appeals in TCI Business Capital, Inc. v. Five Star American Die Casting, LLC, 890 N.W.2d 423 (Minn. App. 2017), an officer-misconduct case, listed the elements of a breach of fiduciary duty claim: “duty, breach, causation, and damages.” Time limits apply to these claims, so check the deadline for your claim against current law early. For the steps in a derivative case, including how a company may respond with a special litigation committee, see how derivative lawsuits work in Minnesota.

What should an operating or shareholder agreement say about outside opportunities?

A governing agreement should say which outside activities each owner may pursue and how the company approves anything else. Minnesota’s LLC and partnership statutes let owners define those limits in advance, within statutory bounds; for corporations, a written shareholder agreement sets the owners’ expectations.

• LLC operating agreements. Under Minn. Stat. § 322C.0110, subd. 4, “If not manifestly unreasonable, and without limiting the terms that may be included in an operating agreement,” the operating agreement may “identify specific types or categories of activities that do not violate the duty of loyalty”. It may also restrict or eliminate the duty to account for a benefit derived “from the appropriation of a limited liability company opportunity”. Subdivision 3 bars an agreement that would, “subject to subdivisions 4 to 7, eliminate the duty of loyalty, the duty of care, or any other fiduciary duty”. Under subdivision 8, a court judging whether a term is manifestly unreasonable “shall make its determination as of the time the challenged term became part of the operating agreement and by considering only circumstances existing at that time”. The court may invalidate the term only if it is “readily apparent” that the term’s objective is unreasonable or that the term is an unreasonable means to that objective. A term adopted with a stated business reason gives the court that context.
• Partnership agreements. Under Minn. Stat. § 323A.0103, a partnership agreement may not eliminate the duty of loyalty (see above). It “may identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable”, or set the vote needed to approve a specific act after full disclosure of all material facts. It also may not “eliminate the obligation of good faith and fair dealing under section 323A.0404(d)”.
• Closely held corporations. In a § 302A.751 case, “any written agreements, including employment agreements and buy-sell agreements, between or among shareholders or between or among one or more shareholders and the corporation are presumed to reflect the parties’ reasonable expectations concerning matters dealt with in the agreements,” under subdivision 3a. A shareholder control agreement or buy-sell agreement that addresses outside ventures gives a court the owners’ own answer.

A useful opportunity clause should name the owners’ existing outside businesses, define the company’s line of business, set a written offer-first procedure with a response period, and say what happens to an opportunity the company declines.

What are the next steps when a co-owner diverts an opportunity?

When a co-owner diverts an opportunity, I suggest starting with the facts the Miller factors turn on: how the deal arrived, whether it was disclosed, whether company money, staff, or equipment helped win it, and whether the company could have afforded it. Those facts decide both steps of the test. I also suggest reading the articles, bylaws, operating agreement, or partnership agreement for opportunity terms and approval procedures, because those documents help decide whether the claim is the company’s, yours, or both. If you are the owner who wants to pursue a deal, the same facts matter in reverse, so I suggest disclosing the deal, offering it to the company, and getting the company’s decision in writing. If you would like me to analyze a specific diverted deal or a planned outside venture, email aaron@aaronhall.com with a brief description of the situation and the names of the people and companies involved.