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Tennessee Adopts New Test for Corporate Opportunity Claims

For decades, Tennessee courts have utilized conflicting tests for analyzing the corporate opportunity doctrine.  Recently, however, the Tennessee Court of Appeals addressed this inconsistency by determining that the Delaware test applies to claims under the Tennessee Revised Limited Liability Company Act, Tenn. Code Ann. §§ 48-249-101 to -249-1133 (Supp. 2005).

On October 10, 2019, the Tennessee Court of Appeals adopted Delaware’s “line of business” test for corporate opportunity claims in Mulloy v. Mulloy, No. M2017-01949-COA-R3-CV, 2019 WL 5078924 (Tenn. Ct. App. Oct. 10, 2019).  The court defined this doctrine as follows:

if there is presented to a corporate officer or director a business opportunity which the corporation is financially able to undertake, is, from its nature, in the line of the corporation’s business and is of practical advantage to it, is one in which the corporation has an interest or a reasonable expectancy, and, by embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of his corporation, the law will not permit him to seize the opportunity for himself.

Id. at *7.  To analyze a corporate usurpation claim, the Mulloy court adopted both Delaware’s test and its “corollary.”  Under the test, “a corporate officer or director may not take a business opportunity for his own if: (1) the corporation is financially able to exploit the opportunity; (2) the opportunity is within the corporation’s line of business; (3) the corporation has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimicable to his duties to the corporation.”  Id. at *8 (quoting Broz v. Cellular Info. Sys., Inc., 673 A.2d 148, 155 (Del. 1996)).

Essentially flipping the test’s factors from negative to positive, the corollary instead establishes that “[a] director or officer may take a corporate opportunity if: (1) the opportunity is presented to the director or officer in his individual and not his corporate capacity; (2) the opportunity is not essential to the corporation; (3) the corporation holds no interest or expectancy in the opportunity; and (4) the director or officer has not wrongfully employed the resources of the corporation in pursuing or exploiting the opportunity.”  Id.

Appearing to acknowledge that parties’ burdens could seem conflicting under the test versus its corollary, the appellate court applied a burden-shifting analysis for the first factor, where the fiduciary has the initial burden to “prove that the offer was made to him individually,” and once shown, “the party attacking the transaction has a heavier burden.”  Id. (quoting Guth v. Loft, Inc., 5 A.2d 503, 512 (Del. 1939)).  However, the Mulloy court remained silent on the other factors’ burdens, referencing only in passing the fiduciary’s overall burden to show adherence to his or her fiducial duties.  Id. at *8.

While Mulloy provides greater certainty about the proper framework for analyzing corporate opportunity claims under Tennessee law, how courts will interpret these factors remains unknown.  In affirming that there was no usurpation of corporate opportunity, the Mulloy court deferred largely to the trial court’s factual findings.  Given this relative lack of clarity, future litigants would be well served by looking to courts’ interpretations of Delaware’s test and corollary for guidance on navigating the application of their four factors.

Hannah Kay Hunt Freeman