Breach of Fiduciary Duty Primer

Breach of Fiduciary Duty Primer

The Question : What damages could a plaintiff seek with respect to his fellow shareholders and directors if he believes that they have violated their fiduciary duty?

The Facts : The plaintiff in this case sued his fellow shareholders and directors for taking advantage of a business opportunity with a competitor and leaving him out of the loop. In fact, instead of responding to the plaintiff when he asked them what was going on, the defendants – his shareholders – transferred the assets of the company, including its customer list, cash, and accounts receivable, to a shell company and continued doing business under a new name. Meanwhile the Plaintiff was left without a job, owning worthless stock, in an inactive company, which still owed substantial amounts of money to creditors.

The Analysis : Illinois cases generally permit a plaintiff in cases such as this to seek damages via a “derivative action” on behalf of the company itself. In derivative action, damages can include:

  • Forfeiture of salary during the period in which the defendant breached their fiduciary duty;
  • An award of the pre-transfer value of the Plaintiff’s stock (before the company was gutted);
  • Punitive damages if defendant’s actions were underhanded and deceitful based on the facts;
  • Attorney’s fees incurred in bringing the derivative action against defendants to begin with.

The Reasoning : Directors of a corporation are fiduciaries and may not place themselves in a position in which their individual interests might interfere with performance of their duties. Likewise, they may not use their positions for their own personal gain. A fiduciary’s use of corporate assets to further his own goals is in violation of his duties is a valid basis for damages. Such abuse by a defendant might include, for instance, using the corporation’s assets without compensation or the blessing of the board of directors following full disclosure. Shareholders may therefore recover the value of their stock if the directors converted stock that has an ascertainable value. Complete forfeiture of any salary paid by the corporation to its fiduciary during the time in which their duties were being breached is also a valid form of damages: all such salaries must be disgorged back to the company. Finally, Illinois Courts regularly hold that punitive damages are an appropriate form of damages when shareholders are able to establish claims for breach of fiduciary duty and usurpation of corporate opportunity. This is especially true when the actions of the defendants are underhanded and deceitful.

In a landmark Illinois case on the subject, a shareholder brought an action against the directors of a company who had formed a new entity. The action was for breach of fiduciary duty and usurpation of corporate opportunity. The Plaintiff and two partners founded a company to serve as sales reps for electronics manufacturers. The Plaintiff owned 40% of the stock, but was terminated by the Defendants. After they fired the Plaintiff, the Defendants decided that the corporation was interested in representing computer hardware manufacturers. After meeting with a representative of Apple who refused to do business with them because the company carried a competitors’ line, Defendants decided not to offer the Apple opportunity to their corporate entity and instead set up a separate and distinct corporation to represent Apple. Despite being employed the Defendants actively engaged in business through the shell company and diverted activity, opportunity, and attention away from the original company. Evidence was also produced that showed assets of their original company being used to benefit the new company. That new company was also located in the same office space as the prior company, which underpaid rent to the initial company. In the end the Defendants breached their fiduciary duties to the corporation and to their fellow shareholder because they failed to offer the Apple opportunity to the initial company and used company assets for the benefit of the shell.

The Conclusions : In the cited Illinois case, the Court held that Defendants owed a substantial portion of their professional time to the initial company but spent more time with the shell company. As to damages the Court determined the dollar value of the Plaintiff’s stock, then assessed punitive damages of $3,000,000.00 and held that mathematical proportionality between punitive and compensatory damage awards is not required.

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