How a Company Insider Can Leave, Take Company Business and Not Breach Her Fiduciary Duty

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In a previous blog post, The Fiduciary Duty of Preserving Corporate Opportunities, I wrote:

In general, an officer, director, partner, LLC member or shareholder in a closely held corporation owes a fiduciary duty not to usurp for his personal benefit, a business opportunity that could and should belong to the corporation.  

While I have no qualms about that statement, a recent decision out of the Massachusetts Superior Court found that a company insider was not liable for breach of fiduciary duty even though she terminated her employment relationship with the company and started her own independent business that undertook the exact same work she had been doing for her prior company. 

In Ricci Consultants, Inc. v. Bournival, RCI provided actuarial services for company pension and retirement plans.  Linda Bournival also did actuarial services, and she specialized in public pension and retirement plans.  Because Stephen Ricci focused primarily on private companies, he was interested in hiring Bournival to join RCI.  As such, in January 2007, Bournival entered into an employment agreement with RCI, and that agreement also involved her buying a one-third equity interest in the business.   

For a variety of reasons, Bournival eventually became disenchanted with the her relationship with RCI, and she ultimately resigned to start her own company, which did the same actuarial work that she had been doing for RCI.  Less than two weeks later, RCI filed suit, alleging that Bournival’s conduct amounted to a breach of fiduciary duty because she, essentially, stole RCI’s clients for herself.

The matter eventually went to trial, and the fiduciary duty claim was tried to a judge, who found that no breach had occurred for two primary reasons.  First, the judge noted that:

No shareholder agreement, employment agreement, noncompetition agreement or provision of the corporate articles of incorporation or bylaws prevented [Bournival] from leaving and earning a living with her actuarial skills, so long as she did not take advantage of corporate opportunities of RCI. 

Second, the trial judge found flaws in RCI’s argument that by leaving RCI, Bournival rendered the company incapable of doing public sector work:

Contrary to the position of RCI, [Bournival’s] departure did not leave RCI totally unable to carry out the public sector [work].  Ricci could have hired someone to carry out her responsibilities for public sector work … or, if he desired, perhaps with some extra effort to get up to speed since most of his work was with private benefit plans, complete the work himself.  

Further, while not directly addressed by the court, it is important to keep in mind that a defense to a claim of breach of fiduciary duty by diverting a corporate opportunity exists if the company cannot avail itself of the opportunity at issue.  In this case, therefore, Ricci’s admission that RCI could not undertake public company work without Bournival amounted to an admission that RCI could not avail itself of the corporate opportunity it claimed she diverted.

Accordingly, in-house counsel (particularly those who work for closely held corporations) should be mindful that a court is likely to allow an insider to leave her job and pursue the same business as the company if (i) the company has not procured some sort of agreement restricting the fiduciary’s ability to do so; and/or (ii) the company does not take steps to ensure that someone else at the company can fill the role of the exiting fiduciary.  Failing to do so can leave the company in the position that RCI found itself – with its business gone and no recourse.

Topics:  Breach of Duty, Directors, Fiduciary Duty, Officers, Usurped Business Opportunity

Published In: Business Torts Updates, General Business Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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