Fiduciary Duties of Senior Employees

Directors, officers, and some senior employees of corporations owe a fiduciary duty to the corporation.  A fiduciary duty is a legal way of saying that the person is in a position of trust toward the company.

As a fiduciary, the person is not allowed to act in a way that is inconsistent with his or her duty of loyalty to the employer. An employee acting in conflict of interest can often be terminated for cause.  Typical examples include an employee setting up a competing business, doing work on the side for cash, disclosing secret company information, leaving the company and soliciting the company's customers for a competitor, or using confidential information.

A breach of fiduciary duty or a conflict of interest can also expose the employee to liability to the employer for any damages the employer may suffer as a result of the employee's conduct.  In other words, if a senior employee set up a competing business and solicits your customers even before quitting, you may be able to sue him or her for the loss of revenue or profit that you can fairly trace to the customer.

These situations can be somewhat alleviated by having proper agreements in place to set out what each person?s responsibilities are when they leave the corporation.  However, there is no way to prevent all problems; only ways to try to make them smaller problems.

A familiar situation is when one of the shareholders (and directors) in a privately-held corporation decides to set up a competing business and go it alone.  What are the other shareholders to do?

Unfortunately, the necessary relief often requires a dip into the wallet.  You may need to bring an application to the court to get an injunction against the other person to stop them from competing. You will also want to get an order that the shareholder is required to sell his shares to you at fair market value (to determined by an independent auditor).  If you cannot afford to buy the shares, you may need an order dissolving the corporation.

You may need to officially terminate the employment of the person, if they are on the books as an employee.  You may also need to get an order for the return of all company property.  You will want an order that the person resign as a director of the corporation, if you do not have the voting power to remove him. 

You will need to change all the banking and credit authority, so that the person cannot access company credit and funds. This may freeze your finances in the short term, and you need to be able to deal with your suppliers appropriately.

If all this seems frightening, it should be.  You could spend well into the 5 figures if the other party does not cooperate. All the more reason to have shareholder agreements with buy-sell provisions, provisions for the termination of the employees and directors, non-competition agreements and more.  A little money spent now to avoid a lot later.