Corporate authority comes with obligations, and an executive cannot always put personal interests ahead of the company they serve. Corporate officers are often entrusted with significant authority. They may control company finances, negotiate contracts, develop relationships with customers and vendors, access confidential information, and identify new business opportunities.
That position can also create opportunities for conflicts. An officer might start a competing business while still working for the company, redirect a valuable opportunity to themselves, provide confidential information to a competitor, or cause the corporation to enter into a transaction that benefits them personally. Depending on the circumstances, that conduct can become much more than an internal employment problem. It can lead to claims for breach of fiduciary duty and corporate litigation seeking damages, disgorgement, injunctive relief, or other remedies.
The Duty of Loyalty
Corporate officers generally occupy positions of trust. Among the fiduciary obligations that may arise from that relationship is the duty of loyalty. At its core, the duty addresses whether someone entrusted with corporate authority improperly used that position to advance personal interests at the corporation’s expense.
This does not mean an officer can never have outside investments, business interests, or financial relationships. The problem arises when those interests conflict with obligations owed to the corporation and the officer uses corporate authority, information, assets, or opportunities for personal benefit. That distinction frequently becomes central when disputes over executive conduct lead to litigation.
Conflicts of Interest
An officer may sometimes find themselves on both sides of a corporate transaction. For example, suppose an executive recommends that the corporation retain a particular vendor. What the company does not know is that the officer has a financial interest in that vendor. The transaction may still provide value to the corporation, but the undisclosed conflict can raise serious concerns.
Whether the concerned officer disclosed the relationship, who approved the transaction, whether the terms were fair to the corporation, whether the officer participated in the decision, and whether the officer personally profited can all become important. The circumstances can significantly affect whether the transaction is viewed as a legitimate corporate decision or potential self-dealing.
Competing With the Corporation
Competition can create another source of conflict. An officer preparing to leave a company may be permitted to make certain preparations for their future. Actively competing with the corporation while still owing fiduciary obligations can raise very different issues.
Consider an officer who secretly establishes a competing company and begins directing existing customers, employees, vendors, or business opportunities toward the new enterprise before leaving. The dispute is no longer simply about an employee changing jobs. The corporation may contend that the officer used a position of trust to build a competing business at the corporation’s expense.
Diversion of Corporate Opportunities
Some of the most valuable assets a company encounters never appear on a balance sheet. An acquisition opportunity, potential customer, investment, property purchase, strategic partnership, or new business venture can have substantial future value. If an officer learns about an opportunity because of their position with the corporation and pursues it personally, the corporate opportunity doctrine may become relevant.
Whether an opportunity belonged to the corporation can be a fact-intensive question. The nature of the opportunity, how the officer learned about it, its relationship to the corporation’s business, and whether the corporation had an interest or expectancy in pursuing it may all be significant. A dispute over a diverted corporate opportunity can therefore become a substantial component of a fiduciary-duty claim.
Misuse of Confidential Information
Corporate information can also become a significant issue when an executive relationship deteriorates. Officers may have access to customer information, pricing, financial data, strategic plans, vendor relationships, proposed transactions, business methods, and other confidential information.
An officer who uses that information to benefit a competing business, solicit customers, negotiate against the corporation, or obtain another personal advantage may expose themselves to legal claims. Misuse does not necessarily require someone to leave the office carrying physical documents. Emails, downloads, cloud access, forwarded files, text messages, and other electronic records may later become important evidence of what information was accessed and how the officer used it.
Self-Dealing
Self-dealing is not limited to an officer writing themselves a check from the corporate account. It can involve causing the company to enter transactions with an affiliated business, directing contracts to relatives or associates, using corporate property personally, receiving undisclosed compensation, or structuring transactions that provide the officer with a personal benefit.
The common issue is the conflict between the officer’s personal interest and the interests they were entrusted to protect. That is why the process surrounding a transaction can become as important as the transaction itself. Disclosure, authorization, corporate records, financial terms, and the involvement of disinterested decision-makers can all matter.
Damages and Disgorgement
When a corporate officer breaches fiduciary duties, the appropriate remedy depends on the conduct and resulting harm. The corporation may seek damages for losses caused by the misconduct. Damages are not necessarily the only remedy. In some circumstances, a corporation may seek disgorgement of profits or other benefits obtained through the alleged breach. That distinction can matter when an officer personally profited from the conduct, even though calculating the corporation’s precise financial loss may be difficult. Other equitable remedies may also be available depending on the circumstances.
Injunctive Relief
Corporate litigation does not always begin after the damage is complete. Suppose an officer is actively soliciting important customers for a competing company, preparing to complete a transaction involving a disputed corporate opportunity, or using confidential corporate information. Waiting for a lawsuit to proceed through the ordinary litigation process may not adequately protect the company.
In those circumstances, the corporation may consider seeking injunctive relief designed to prevent certain conduct while the underlying dispute is litigated. Whether temporary or preliminary injunctive relief is available depends on the particular facts and applicable legal standards. But when the corporation cannot easily repair the threatened harm with money later, the timing of the company’s response can become critical.
When an Executive Dispute Becomes Corporate Litigation
Not every disagreement between a corporation and one of its officers involves a breach of fiduciary duty. Executives make decisions that others may disagree with. Business strategies fail. Relationships between officers and boards deteriorate. The critical distinction is often between an officer making a disputed business decision and an officer using corporate authority for an improper personal benefit.
At Alisme Law, we represent corporations, shareholders, directors, and executives in corporate litigation throughout New York. When disputes involve fiduciary duties, conflicts of interest, corporate opportunities, self-dealing, competing businesses, or misuse of confidential information, we help our clients evaluate the conduct at issue and develop a litigation strategy designed to protect their interests.
Contact us to schedule a confidential case evaluation at 917-540-8432.
This article is for informational purposes only and does not constitute legal advice.