The Business Litigation Blog

Former Officer and Shareholder Breaches Fiduciary Duty By Starting Competing Company

A shareholder and corporate officer of a closely-held business owes a fiduciary duty to the company to refrain from competing, even if he is effectively forced out of his position. In March 2016, the Northern District of Illinois decided Root Consulting, Inc. v. Insull, in which it granted summary judgment for the plaintiff on its claims that its former vice president breached his fiduciary duty by starting a competing business.

 

Root Consulting is an Illinois-based corporation providing IT services in Illinois and Texas. Scott Taylor is founder and president of Root Consulting. William Insull was the company's vice president. He is also a shareholder. Part of the dispute revolved around when Insull left his post as vice president. Insull claimed he was forced out in July 2013 when Root Consulting stopped paying his salary. Root Consulting claimed Insull did not resign until February 2014. (The majority of facts, as well as Insull's verified answer, indicate he did not resign until February 2014.)

 

In October 2013, Insull started his own company - Root Services - providing IT services in Houston, Texas. The court found that Insull, on behalf of Root Services, conducted business between July 2013 and February 2014 without informing Root Consulting of any potential business opportunities. Furthermore, it appeared as though Root Services used Root Consulting resources to complete some of its projects. However, Insull maintained that many of his new customers had never been customers of Root Consulting. Ultimately, the court did not care.

 

Corporate officers owe a fiduciary duty to the corporation and to the corporate shareholders. Therefore, while an employee may plan and develop a competing business while still employed (as long as the employee does not actually compete until after his employment is terminated), a corporate officer may not. Corporate officers must disavow any corporate opportunity that would place the officer's personal interest in conflict with the corporation. Similarly, the corporate officer cannot take a business opportunity developed through the use of corporate assets. Therefore, if Insull was the vice president of Root Consulting between July 2013 and February 2014, he plainly breached his fiduciary duty by operating Root Services during the same time period.

 

The court also found that Insull breached his fiduciary duty as a shareholder. Shareholders in closely-held corporations owe each other a fiduciary duty similar to those owed among partners in a partnership. A shareholder being forced out of a corporate office does not negate his status as shareholder; therefore, as long as the shareholder maintains his ownership interest, he continues to owe a fiduciary duty.

 

Here, regardless of whether Insull's role as vice president ceased in July 2013 or February 2014, he maintained a 47.5 percent ownership interest in the company at all relevant times. Thus, he owed a fiduciary duty to place the corporation's interests above his own personal gain, even if he was "frozen out." If Insull actually believed he was "frozen out" of the corporation, his proper remedy was to seek judicial resolution of his shareholder dispute - not to start a competing company.

 

If you have questions about the duties and obligations of shareholders and officers – both current and former, please contact the Patterson Law Firm at 312.223.1699. We can advise you on your legal rights and help you choose the best course of action.

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