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Officer and Shareholder of a Closely Held Illinois Corporation has a Fiduciary Duty not to Compete

Root Consulting Inc. v. William Insull, 2016 WL 806556 (N.D. Ill., March 2, 2016)

An officer and shareholder of a closely held corporation has a fiduciary duty not to compete with the company even if he is forced out of the organization.

William I. was sued by Root Consulting Inc. and fellow shareholders for breach of fiduciary duty after he formed a competing company and solicited business from Root customers, while still a vice president and shareholder of Root (Root Consulting Inc. v. William Insull (2016 WL 806556)). Root is an Illinois-based information technology company with operations in Illinois and Texas; William I. is a Texas resident. William I. claimed his employment ended in July 2013 when he was “frozen out” (or constructively terminated) by the other shareholders, and therefore he had no fiduciary duty to refrain from competition. However, U.S. District Judge Robert Blakey found that he remained vice president and 47.5% shareholder until February of 2014, and that he continued to do work for Root after his alleged termination date.

Under Illinois law, corporate officers owe a fiduciary duty to their corporation and to its shareholders and may not enrich themselves at the expense of the corporation. Under the “corporate opportunity” doctrine, a fiduciary cannot take personal advantage of business opportunities that arise from and rightfully belong to the corporation. The officer’s resignation does not relieve him of liability if he acquired the opportunity before his employment ended.

In granting Root summary judgment, Blakey made separate findings of fiduciary duty based on William I.’s capacity as an officer and as a shareholder. First, the judge noted that he admitted in court filings that he held the title of vice president at Root through February 2014, during which time he owed the company a fiduciary duty. Independent of that fact, the judge also found a fiduciary duty because William I. was not constructively discharged under the legal definition of that term, which requires that the employee resign from employment. “There is no evidence showing that he resigned or quit,” Blakey wrote, despite the defendant’s claim that Root stopped paying him. “To the contrary, the evidence shows that [William I.] remained working for Root until February 2014.” The judge cited the fact that William I. conducted business on behalf of Root via email after his alleged “discharge,” and received reimbursement checks from the company. Third, even if William I. had resigned, he still could be found in breach if business transactions that he completed after his departure were begun or based on information obtained beforehand.

In addressing duties as a shareholder, Blakey cited Illinois appellate and Seventh Circuit case law that provides “[S]hareholders in a close corporation owe each other fiduciary duties similar to those of partners in a partnership.” The judge compared the instant case with Rexford Rand Corp. v. Ancel, 58 F.3d 1215 (7th Cir. 1995), which involved an officer and minority shareholder who was terminated and, like William I., claimed to be “frozen out” of his company. The Seventh Circuit found the defendant had a duty as a 25% shareholder to place the company’s interests ahead of his own that was independent of the circumstances of his termination. In rejecting William I.’s arguments under Rexford, Blakey wrote that even if the defendant had indeed been frozen out of Root, this did not excuse his “misconduct” as a shareholder because he could have sought a judicial resolution for his grievances with the company instead of “taking matters into his own hands.”

The judge found that Root had provided sufficient evidence of damages resulting from defendant’s misconduct, and the only remaining issue to be worked out was the amount of a damage award.

Our Chicago non-compete agreement and business dispute attorneys have defended high level executives in covenant not to compete and trade secret lawsuits. A case in which our firm defended a former Motorola executive was covered in Crain’s Chicago business. You can view that article by clicking here.

DiTommaso Lubin Austermuehle a firm of Chicago business dispute lawyers handles litigation over non-compete clauses for individuals and businesses of all sizes, including small or closely held businesses for whom competition from an ex-employee can be a serious threat. Our Chicago business lawyers with offices near Elmhurst, Oak Brook and Chicago have substantial experience in restrictive covenant and breach of contract cases, and we are proud of our record of strong results.

DiTommaso Lubin Austermuehle a Chicago business litigation law firm represents both plaintiffs and defendants in such cases, and can also help stop litigation before it starts by reviewing contracts to look for covenants and clauses that could create problems later. Our firm has also handled many shareholder and LLC disputes between owners of closely held corporations, and LLCs.

Based in Oakbrook Terrace and downtown Chicago, our Gurnee and Des Plaines non-compete clause and business dispute lawyers take cases from Naperville, Lake Forest and Northbrook and many other cities throughout Illinois, as well as in Indiana, Wisconsin and the entire United States. To learn more or set up a free consultation, please contact one of our Chicago business dispute lawyers through the Internet or call toll-free at 1-877-990-4990 today.