The Illinois Appellate Court has reiterated what the Illinois Supreme Court said a few years ago: Employees of a corporation owe a duty of loyalty to the company by which they are employed. And that it is a breach of their fiduciary obligation to appropriate for their own gain an opportunity that rightfully belongs to the company. Advantage Marketing Group, Inc. v. Keane, 2019 IL App (1st) 181126.
In this instance it was clear that the employee was far more than an ordinary employee and that it was not clear whether the company had considered the opportunity but had decided to take a pass on it.
Keane was one of the founders of Advantage Marketing Group (AMG) and, even at the time of his purported misconduct, owned 35% of AMG’s stock. He had served AMG as an officer and director, but was simply an employee when he seized a potential corporate opportunity and made good use of it through another corporation, Keane, Inc. d/b/a The Mail House.
In addition to owning 35% of AMG, Keane performed or had performed the following for AMG:
- Hired and fired employees
- Had access to all of AMG’s books and records including client lists, employee records, tax documents, vendor information and billing data
- Had a bonus equal to AMG’s majority stockholder
- Had developed and maintained AMG’s financial records
- Had explored potential strategic acquisitions in the letter-shop business
In the summer of 2013 Keane and AMG’s majority stockholder, Patty Herman, discussed the potential acquisition of The Mail House, a competitor of AMG.
Keane resigned from AMG on September 4, 2015. Prior to his resignation he began making preparations for the acquisition of The Mail House. He organized a new corporation named Keane, Inc. d/b/a The Mail House. He told AMG’s clients and vendors AMG was in financial distress, and solicited his son, an AMG employee, to join him at the new corporation. He also obtained samples of confidential client information and delayed in returning them after being demanded to do so by AMG’s counsel. He registered an internet domain name “mailhousedm.com”. After Keane left AMG, The Mail House was in direct competition with AMG.
AMG sued Keane charging breach of fiduciary duty and improperly appropriating a potential business opportunity (the acquisition of The Mail House) for himself.
Keane defended saying that as an employee he had no fiduciary duty to AMG and, furthermore, that he had discussed the potential acquisition with AMG’s majority stockholder but AMG had not moved forward with it. The court ruled against Keane on both points.
The court said that it was settled Illinois law that an employee owes a duty of loyalty to his employer and prohibits an employee from taking advantage of a business opportunity that belongs to his employer, while still employed.
The court did say that an employee may plan, form and outfit a competing company while still working for his employer. But that was as far as he can go. He cannot commence competing with his employer.
What’s the point? This was an easy decision for the court especially in view of the fact that Keane remained a 35% stockholder in AMG. But the critical point was that an employee must be loyal to his employer while employed and not seize opportunities that would normally flow to his employer. He can make preparations to leave, but cannot actively compete before doing so.
For more information and to raise any questions, please contact any of our business attorneys.
The board of directors made the decision to acquire a company for $100 million. The negotiations and the due diligence process were difficult, but the board finally approved the acquisition and the transaction closed. After closing, the acquirer determined that the value of the acquired company’s assets were greatly overstated and the acquiring company took a loss on its books. The shareholders of the acquiring company have met to determine whether to file litigation against the directors.
In Illinois, courts have ruled that the “business judgment rules acts to shield directors who have been diligent and careful in performing their duties from liability for honest errors or mistakes of judgment”. Absent “bad faith, fraud, illegality or gross overreaching, the courts are not at liberty to interfere with the exercise of business judgment by corporate directors”. Thus, just because a board made the “wrong” business decision, does not mean that the directors are liable to the shareholders.
While the courts are reluctant to make business judgments for companies, this does not always prevent shareholders from “second guessing” decisions of the board. Illinois law provides that a corporation may indemnify its directors and officers from any liability if such director or officer “acted in good faith and in a manner he or she believed to be in, or not opposed to, the best interests of the corporation”. Since the law is permissive, in order for a corporation to attract quality persons to serve as an officer or director, it may wish to agree to indemnify such person in such situations. It is important from the corporation’s perspective to draft such an agreement, in a manner that, while protecting the “well-intended” officer or director, also protects the company. If you have any questions about directors’ and officers’ liability to the corporation, or would like to discuss your company’s legal concerns, please feel free to contact the business lawyers at Levin Ginsburg.
For more information, please contact:
Morris R. Saunders at: (312) 368-0100 or firstname.lastname@example.org