Fiduciary Duties of Departing Directors and Officers
Last month, we provided you with the 101 on your fiduciary obligations as an officer or director of an Illinois business. Today, we want to discuss what these obligations actually mean when it comes to resignation from the company.
While a corporate employee may plan and prepare a competing business while still working for an employer, corporate officers stand on a different footing and may not hinder the corporation’s business when preparing to leave the corporation. This is because corporate officers owe a fiduciary duty of loyalty to the company, which means they must not (1) actively use their positions within the corporation for their own personal benefit, or (2) hinder the ability of the corporation to continue its business successfully.
It is important to understand that these fiduciary duties exist both before and after an officer’s departure. Let’s discuss both the before and after scenarios.
Even after an officer resigns, liability for transactions that began during his or her position at the company still remains. This means that even if an officer left the company years ago, he or she may still be on the hook for a previous transaction if it involved the breach of the officer’s fiduciary duties to the company. Additionally, even after departure, officers may not enter into competing transactions which are based in any part on information learned during the officer’s relationship with the corporation. In other words, an officer may not use confidential business information learned during the course of his or her duties to the corporation for the benefit of a new competing business.
Some examples of pre-departure activities that will likely be found to violate fiduciary duties include: (1) soliciting the business of the company’s customers before the officer leaves, (2) failing to disclose that the officer is going to form a rival company, (3) using the company’s facilities or equipment to assist in developing the new business, (4) soliciting fellow employees to join a rival business, (5) using the company’s resources for use in the new business, or (6) generally failing to act in the company’s best interests in dealing with customers or opportunities that belong to the company. Such actions have been found by Illinois courts to violate fiduciary duties.
Departing officers and directors should be particularly concerned about breaching fiduciary duties because of the extensive damages that can be awarded against them. As explained in our previous article, violations of fiduciary obligations can result in complete forfeiture of compensation received by the officer during the period of the fiduciary breach. In other words, if an officer is found to have violated fiduciary duties for a period of one year while he or she was planning to leave and form a competing business, then that officer may need to pay an entire year’s worth of his or her compensation as part of the damages owed to the company. Additionally, courts may even award an injunction prohibiting business in competition with an officer’s former employer, which would completely shut down any current employment opportunity for that former officer. Also, where there are serious circumstances (i.e. extreme cases of lying, stealing, and ill intent), additional damages, court costs, and attorneys’ fees may also be awarded.
With the potential of serious damages involved, it is vital that both officers and corporations carefully assess fiduciary duties. You should consult with an attorney if you have any concerns regarding a departing officer’s duties to your company or even your own duties if you are considering departure in the near future.
Should you have any questions about fiduciary duties or any other laws that may affect your business, or would like to schedule a free initial consultation, please contact Waltz, Palmer & Dawson, LLC at (847)253-8800 or contact us online.
Waltz, Palmer & Dawson, LLC is a full-service law firm with various areas of service to assist your business, including: Employment Law, Intellectual Property, Commercial Real Estate, Business Immigration, Litigation and general Business Law services. Individual services include Estate Planning, Wills and Trusts, Probate, Guardianship, Divorce and Family Law.
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