Fiduciary Duty of Directors. In 1978, David Brandt and Dean Somerville incorporated Posilock Puller, Inc (PPI), to make and market bearing pullers. Each received half of the stock. Initially operating out of McHenry, North Dakota, PPI moved to

Question

Cooperstown, North Dakota, in 1984 into a building owned by Somerville. After the move, Brandt's participation in PPI diminished, and Somerville's increased. In 1998, Somerville formed PL MFG as his own business to make components for the bearing pullers and sell the parts to PPI. The start-up costs included a $450,000 loan from Sheyenne Valley Electric Cooperative. PPI executed the loan documents and indorsed the check. The proceeds were deposited into an account for PL MFG, which did not sign a promissory note payable to PPI until 2000. When Brandt learned of PL MFG and the loan, he filed a suit in a North Dakota state court against Somerville, alleging in part a breach of fiduciary duty. What fiduciary duty does a director owe to his or her corporation? What does this duty require? Should the court hold Somerville liable? Why or why not?

Answer 1

Fiduciary duty of directors
The fiduciary obligation of undivided loyalty imposed on directors and officers precludes them from appropriating a business opportunity that belongs to their corporation. A corporate opportunity exists when a proposed activity is reasonably related to the corporation's business and is one in which the corporation has the capacity to engage. Here, PPI had a corporate opportunity to make its own parts. This opportunity was reasonably related to its business, and it had the capacity to take advantage of the opportunity and the financial ability to do so, as shown by the fact of the loan arranged by PL MFG. The court should hold Somerville liable. His involvement with PL MFG constituted a wrongful appropriation, or usurping, of PPI's corporate opportunity, and a breach of Somerville's fiduciary duty to the corporation.