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Employee Owes Fiduciary Duty to Employer and Cannot Misappropriate a Corporate Opportunity

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.

Michael Weissman

mweissman@lgattorneys.com

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Selling Your Business?

John Smith owned a small manufacturing business.  One day he received a call from one of his competitors who said he was interested in buying John’s business.  John was now 75 and this seemed like the perfect opportunity for him to retire and have that “nest egg” for him live comfortably in retirement.

John met with the buyer and they discussed, in general, John’s business.  After the meeting, the buyer presented a letter of intent to John, which proposed a purchase price of $10,000,000, subject to the buyer’s due diligence investigation of John’s business.  John felt pleased with the letter of intent and signed and returned it to the buyer.

During a long and protracted (and quite thorough) due diligence, the buyer and his accountants and lawyers examined the business and its books and records.  Based upon their examination, they advised the buyer of various legal and financial risks that John’s business was exposed to and which could become issues that the buyer would have to face.

John could not produce all of his current contracts with his customers.  The contracts which he had contained provisions which could cause the contracts to be terminated upon a sale of the business or a transfer of the ownership of the business.  Their key employees had no employment agreements and could compete with the business once they terminated employment.  The leases for the business’s facilities could not be assigned.

Despite the issues with the business, the buyer was still interested in purchasing the business.  The bad news was that the revised purchase price was to be $8,500,000 with a significant portion to be held in escrow pending resolution of various legal issues.

The above scenario is very common with small business owners.  Bigger companies who regularly acquire smaller companies are “professionals” in the acquisition business.  They know exactly what to look for and they know how to “string the seller along” until they present a reduced offer which most sellers feel they have to accept.

If you are thinking of selling your business, make sure that your business is ready to be sold and that you have copies of all contracts and leases and that you understand what they provide and how they will be affected upon a sale.  Have written employment agreements with all your “key employees.”  Pay attention to your inventory, your accounts receivable and other assets which “drive the sales price.”  Protect your intellectual property by obtaining patents, to the extent applicable, and trademarks.

If you are considering selling your business and would like a “legal check-up,” please do not hesitate to contact:

Morris Saunders at:
msaunders@lgattorneys.com or 312-368-0100.

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