Shareholder and Corporate Officer Fiduciary Duty
A shareholder and corporate officer of a closely-held business owe a fiduciary duty to refrain from competing even if they were forced out of the position. In March 2016, the Northern District of Illinois granted summary judgment for the plaintiffs. The plaintiffs claim their former vice president breached his fiduciary duty by starting a competing business.
A Shareholder Competes While Still Employed
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 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 were never customers of Root Consulting. Ultimately, the court did not care.
While an employee may plan a competing business while still employed, 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.
Insull Breached His Fiduciary Duty as a Shareholder
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. 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, please contact us. We can advise you on your legal rights and help you choose the best course of action.