August 21, 2018
Private Equity: Importance of Corporate Opportunity Carve-Outs
The “corporate opportunity” doctrine provides that a corporate fiduciary who take a business opportunity that might have been instead given to the corporate entity is liable to the company for any resulting gains. If you’re a private equity fund with portfolio companies in similar industries, this can create some thorny problems.
However, this Ropes & Gray memo (p. 11) reviews the Delaware Chancery Court’s recent decision in Alarm.com Holdings v. ABS Capital Partners, (Del. Ch.; 6/18) and says that putting in place well drafted contractual carve-outs at the outset of a business relationship can go a long way to preventing corporate opportunity problems from arising. Here’s an excerpt:
This decision highlights that financial sponsors should seek to draft transaction and governance documents to make clear that the sponsor may have invested in the target’s competitors, may invest in those competitors in the future, and is not subject to the “corporate opportunity” doctrine.
While it is not always commercially possible to do so, it is also desirable for such language to also include express “residual information” disclaimers noting that there is information the investor may learn about the target through its investment that it cannot then remove from its collective knowledge, as well as language stating clearly that parallel investments are permissible. Such language could prevent claims for breach of fiduciary duty or misappropriation of trade secrets, or, at a minimum, provide the sponsor with strong arguments to support a motion to dismiss if such claims are asserted.
– John Jenkins