Asserting or Defending Against a Potential Usurpation of Corporate Opportunity Claim
The Court of Chancery's decision in In re Mobilactive Media, C.A. No. 5725-VCP (Del. Ch.), provides useful guidance to practitioners asserting or defending against a potential usurpation of corporate opportunity claim. The action arose from a joint venture between plaintiff Terry Bienstock and defendant Silverback Media PLC. Bienstock and Silverback founded Mobilactive Media LLC in 2007 to pursue mobile-marketing opportunities in North America. The Mobilactive limited liability company agreement defined the business of the company as the development and marketing of technology to enable and enhance interactive video programming and advertising content. Pursuant to Section 13.5 of the agreement, the parties agreed that Mobilactive would be the only means by which they or their affiliates would engage in the business. If one of the parties learned of an opportunity in Mobilactive's line of business, they had to present that opportunity to Mobilactive and could not engage in the business opportunity themselves without the prior written consent, and decision not to pursue the opportunity, by the other members of Mobilactive.
After the parties entered into the agreement, Silverback tried to buy out Bienstock multiple times, according to the opinion. Bienstock declined Silverback's buyout offers. In June 2007, Silverback entered into a letter of intent to acquire a company engaged in mobile communications and completed the acquisition in September 2007. Silverback continued to acquire companies engaging in various mobile and marketing activities. Silverback never presented these acquisition opportunities to Mobilactive or Bienstock. While Silverback pursued acquisitions, Mobilactive engaged in only two marketing campaigns. Bienstock, however, pursued other opportunities on behalf of Mobilactive.
In August 2010, Bienstock and Silverback instituted litigation against each other arising from the joint venture. The court issued its opinion after a five-day trial, post-trial briefing and post-trial oral argument.
The court first addressed Silverback's argument that Bienstock's claims arising from Silverback's acquisitions were barred by laches. The analogous statute of limitations for Bienstock's usurpation of corporate opportunity claim was three years. Silverback argued that Bienstock's claims accrued in June 2007 when it announced the first acquisition and Bienstock learned Silverback was competing with Mobilactive. If Bienstock's causes of action accrued in June 2007, then he had to file litigation by June 2010. Distinguishing between announcement of a deal and consummation of a deal, the court rejected Silverback's laches defense. The court stated that Silverback only had a nonbinding letter of intent in June 2007 and held that a claim for damages based on usurpation of a corporation opportunity was not ripe until the parties entered into a binding commitment.
As far as the substance of Bienstock's usurpation of corporate opportunity claim, the court first discussed how such a claim is a type of breach of fiduciary duty claim. The court noted that the agreement provided the parties were fiduciaries to each other and required the parties to act in the best interest of Mobilactive. The court also emphasized that the relationship of joint venturers under Delaware law is fiduciary in nature.
The court then turned to the elements of a usurpation of corporate opportunity claim. Those elements are: (1) an opportunity within the company's line of business; (2) the company has an interest or expectancy in the opportunity; (3) the company is financially able to exploit the opportunity; and (4) by taking the opportunity for itself, the corporate fiduciary is placed in a position contrary to its fiduciary duties to the company. Analyzing the businesses of the companies acquired by Silverback, the court concluded that all but one fell within Mobilactive's line of business. The court focused on the language of the agreement in determining whether Mobilactive had an interest or expectancy in the acquisitions. Because the parties had expressly contracted for the right to have opportunities presented to them, the court held it was axiomatic that the second element of a usurpation of a corporation opportunity claim was satisfied. The parties were sharply divided over whether Bienstock and Mobilactive were financially able to exploit the opportunities pursued by Silverback. Relying on Yiannatsis v. Stephanis ex rel. Sterianou, 653 A.2d 275 (Del. 1995), the court held that Silverback had a contractual obligation to present opportunities to Mobilactive parallel to its fiduciary duties and it was not necessary to consider Mobilactive's financial condition. In addition, the court found that Bienstock's testimony was sufficient to make a prima facie showing of financial ability. Finally, the court found the fourth element satisfied because Silverback had placed itself in a position inimical to its duties to Mobilactive by usurping opportunities that should have been offered to Mobilactive. Evaluating the damages testimony offered by the parties' experts, the court ordered Silverback to disgorge a little more than $3 million in profits.
This decision offers several useful practice pointers for bringing or defending against a potential usurpation of corporate opportunity claim. First, in evaluating whether the statute of limitations is running on a usurpation claim, counsel must consider whether there is a nonbinding letter of intent or a binding deal. Litigate too soon and the claim may not be ripe. Wait too long to litigate and the claim might be time-barred. Second, the existence of a contractual right to the presentation of corporation opportunities could have significant consequences on a claim. A party wishing to pursue a business opportunity that it does not believe its partner has the financial resources to pursue needs to remember that its partner's financial resources may not be particularly relevant if there is a contractual and fiduciary obligation to present corporate opportunities. The existence of a contract could also impact the analysis of whether an opportunity is in the company's line of business. If the contract defines the company's business broadly and requires parties to present all opportunities in the company's business, then an opportunity is more likely to be viewed as an opportunity of the company.