Breach of Fiduciary Duty – Business Opportunity Doctrine

What happens when friends, family-members, or coworkers go into business together?

A lot, it turns out. For one thing, the minute they contribute time, money, hard-work, and contacts, they give rise to mutual obligations of honesty, good-faith, best-efforts, and what is generally known as fiduciary duty – including the duty of good faith, and duty of loyalty.

So, what is a fiduciary duty?

It is what a parent owes their child, a doctor owes their patient, or a lawyer owes their client: it is the obligation that comes with being in a superior position. How often does that happen? You’d be surprised. Every officer and director of a company, as well as every partner in an undertaking (no matter how small) has a fiduciary duty, and he or she is a fiduciary.

And fiduciary duties are not one-dimensional. They include

• Fair dealing, and acting in good faith;
• Refraining from taking an opportunity;
• Honesty and full disclosure; and
• Refraining from self-dealing.

Consider, for example, the Business Opportunity Doctrine, employed by Judges to decide if a company officer or director has breached their fiduciary duty by taking advantage of an opportunity that should have benefited all members of the company.  Simply put, the Doctrine states that

(a) a fiduciary who is acting in their official capacity;

(b) may not take advantage of certain opportunities;

(c) unless, after full disclosure, the company passes.

In the case of Graham v. Mimms, considered the standard, the Illinois Appellate Court found that the ‘core principle’ of the Business Opportunity Doctrine was that a company fiduciary may not usurp an opportunity developed through the use of company assets, time, and employees, without first presenting the situation to the company and giving it an opportunity to pass on the opportunity through its Board of Directors. The Court’s reasoning was that when its assets, resources, or people are used to develop or discover an opportunity, the company has the right of first refusal when it comes to that opportunity.

In Preferred Meal Systems, Inc. v. Guse, the Illinois Appellate Court held that a corporate officer who failed to inform the company that other employees were forming a rival company, soliciting fellow employees to join the rival business, seeking business from their employer’s customers, and using company facilities and equipment to develop leads for the new company, breached his fiduciary duty.

But what about real situations?

M. Hedayat & Associates has represented clients throughout Chicago and the Collar Counties who were accused of, or who accused their fellow officers and directors, of breaching the Business Opportunity Doctrine. In those cases, our key considerations were:

• Did the accused party have a fiduciary duty under these circumstances?
• Was an opportunity discovered or developed using company resources?
• Was the company’s Board of Directors advised of the opportunity first?
• Was that opportunity or asset part of the company’s regular business?
• Could the company have benefited if the opportunity had been revealed?

Could your company benefit from an evaluation or legal audit to identify abuses of the Business Opportunity Doctrine?

M. Hedayat & Associates has over 25 years of experience in the field: experience that you want on your side. We proudly serve Clients in Chicagoland and throughout Illinois from our office at 1211 W. Lakeview Ct. in Romeoville. To schedule your free confidential consultation, call 630-378-2200. We look forward to discussing your matter in confidence.