Q&A #62 – Are Board members allowed to pursue funding opportunities for other organizations?

Question: One of my fellow Board members serves as Executive Director for an unrelated nonprofit organization, and recently shared that she will be pursuing a grant opportunity with this other organization that our nonprofit will also be pursuing, which our Board feels will create competition between the two organizations. Is this proper?

Answer: This question raises difficult issues under the “corporate opportunity doctrine,” which is rooted in the fiduciary duty of loyalty. Under the corporate opportunity doctrine, a corporation’s Board members must avoid diverting to themselves opportunities which in fairness ought to belong to the corporation (such as leasing or purchase of property, funding opportunities, mission-based activities, or other business opportunities that could be advantageous the organization). The application of this doctrine is complex and often contentious, so transparency, disclosure, and communication are key to avoiding disputes.

The corporate opportunity doctrine stems from the fiduciary laws applicable to for-profit corporations, but has been held by various courts to apply equally to nonprofit corporations. A case called Guth v. Loft, Inc., 5 A.2d 503 (Del. 1939) set the framework that is still generally followed today.

Under Guth, a Director may not pursue a business opportunity for his/her own interests if the following four factors are present:

1. The corporation is financially able to undertake the opportunity;

2. The opportunity is within the corporation's line of business and is of practical advantage to it;

3. The corporation has an interest or reasonable expectancy in the opportunity; and

4. By taking the opportunity for his/her own, the interests of the Director will be brought into conflict with that of the corporation.

Conversely, a Director will not be prohibited from pursuing a business opportunity for his/her own interests if the following four factors are present:

1. The opportunity is presented to the Director in his/her individual and not his/her 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 has not wrongfully employed the resources of the corporation in pursuing or exploiting the opportunity.

Whether the Board member’s actions were proper in your case depends on the specific facts. It would be more clearly improper if this person learned about the funding opportunity in the course of serving your organization (e.g., at a Board meeting) or if the grant represented a significant source of funds that your organization has relied upon in the past.

There is also a question about whether pursuing a funding opportunity on behalf of another nonprofit raises the type of personal interests that the corporate opportunity doctrine was developed to address. In your case, the fact that the Board member is a (presumably paid) Executive Director of the other organization probably suggests that the Board member is pursuing the opportunity for her own interests, but this is often a difficult issue in the nonprofit context.

Planning Tip –When recruiting Board members who serve as Directors, officers, advisors, or employees of other organizations, which is very common in the nonprofit space, speak frankly and openly with these prospective Board members about the organization’s expectations for how these multiple loyalties will be navigated, and include discussions about specific hypothetical scenarios. A primer on fiduciary duties, including the duty of loyalty and the corporate opportunity doctrine, should be part of the organization’s Board orientations, Board manuals and other materials provided to new Board members, and regular Board training sessions.

There are no easy answers when it comes to the corporate opportunity doctrine. However, Board members should always err on the side of disclosing potentially competitive situations in advance, giving the Board a chance to discuss whether there are solutions that would be consistent with the interests of all organizations involved. This commitment to transparency, disclosure, and communication is a key component of the fiduciary duty of loyalty and will help to avoid bad feelings, disputes, and potentially litigation.

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