by James G. Wargo (Fall 2017)
A fiduciary is a person or party who has an obligation to act in good faith and in the best interests of another individual or entity. The traditional fiduciary duties owed by officers, directors and shareholders under Illinois law include the duty of care and the duty of loyalty.
Duty of Care
The duty of care generally requires an officer, director or shareholder not to act recklessly. The business decisions of officers, directors and/or shareholders are protected by the business judgment rule. “The business judgment rule is a presumption that directors of a corporation make business decisions on an informed basis, in good faith, and with the honest belief that the course taken was in the best interests of the corporation.”
However, a plaintiff may “rebut the presumption by presenting evidence that the director acted fraudulently, illegally, or without becoming sufficiently informed to make an independent business decision.” Ferris Elevator Company, Inc. v. Neffco, Inc., 285 Ill.App.3d 350 (3d Dist. 1996).
Duty of Loyalty
The duty of loyalty requires each officer, director or shareholder to always put the interests of the corporation above his or her own personal interests. The duty of loyalty most often involves situations of conflicts of interest, corporate opportunities, and competing with the corporation. In order to comply with the duty of loyalty, a fiduciary must not engage in self-dealing, gain secret profit belonging to the corporation, compete with the corporation, or seize corporate opportunity.
A conflict of interest will arise when an officer or director is directly or indirectly on both sides of a transaction. Shlensky v. South Parkway Building Corp., 19 Ill.2d 268 (1960). It should be noted that in a conflict of interest situation, the business judgment rule is not applicable. The Illinois Business Corporation Act of 1983 (“BCA”) recognizes that the fundamental concern in an interested transaction is to ensure that the transaction is fair to the corporation.
A corporate opportunity situation arises when a fiduciary appropriates a corporate opportunity for him- or herself as opposed to allowing the corporation to take advantage of the transaction. In one of the leading corporate opportunity cases, the Illinois Supreme Court held that a director has a duty to tender a corporate opportunity to the corporation before the director can personally take advantage of the opportunity. Kerrigan v. Unity Savings Assoc., 58 Ill.2d 20 (1974).
Competing with the corporation involves situations where a fiduciary forms a third party or joins with a third party to compete with the corporation. The issue often litigated in these situations revolves around determining when the fiduciary’s duties terminate. Generally, fiduciary obligations terminate when the fiduciary relationship terminates, including when the officer or director is fired.
Also, Section 7.9 of the BCA allows a shareholder in a close corporation (corporation with a limited number of shareholders) to terminate his or her fiduciary obligations to the corporation by waiving his or her voting and management rights in the corporation. (805 ILCS 5/7.9)
Limitation of liability under the BCA
The BCA allows the articles of incorporation to limit the personal liability of a director or its shareholders for monetary damages associated with a breach of fiduciary duty with certain limitations. 805 ILCS 5/2.10(b)(3). Any such limitation of liability may not eliminate the liability of a director for any breach of the director’s duty of loyalty, acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of the law, or any transaction in which the director derived a personal benefit.