Fiduciary Duty of Loyalty

Under Illinois law, corporate officers, directors, and controlling shareholders owe certain duties to the corporation and, through the corporation, to the shareholders. These duties are known as fiduciary duties. State law generally delineates the types and contours of those duties but broadly speaking those duties are generally subdivided into the duty of care and the duty of loyalty. In Illinois, the duty of loyalty is recognized by statute in the Illinois Business Corporation Act of 1983 (“BCA”).

The duty of loyalty requires a corporate officer, director or controlling shareholder to put the interests of the corporation above his or her own personal interests. The duty of loyalty often arises in circumstances involving conflicts of interest, corporate opportunities, and competing with the corporation. Under Illinois law, an officer must not engage in self-dealing, take secret profits that belong to the corporation, or seize corporate opportunities.

A conflict of interest exists where the director is directly or indirectly on both sides of a transaction with the company. Even if a director is not interested in a transaction, he or she must be capable of rendering independent judgment to avoid breaching his or her duty of loyalty. Circumstances where the duty of loyalty is most often implicated include the following:

1. Sales to or purchases by the corporation from controlling shareholders or entities in which the shareholders have an interest;
2. Oppression of minority stockholders by controlling stockholders in matters such as corporate acquisitions, particularly where the controlling shareholder has an interest in the entity acquiring or being acquired;
3. Usurping corporate opportunities (e.g. buying property that an officer knows the company would have been interested in purchasing);
4. Use of corporate funds to perpetuate control (e.g. freezing out minority shareholders);
5. Excessive compensation;
6. Insider trading;
7. An officer’s starting or purchasing a controlling interest in a competitor of the company;
8. Refusing demands of stockholders to commence derivative suits;
9. Failing to disclose conflicts of interest to the other directors or shareholders of the company; and
10. Improper use of corporate position, property, or information.

Usurpation of corporate opportunity claims arise when a fiduciary secretly takes a corporate opportunity for himself or herself without allowing the corporation to take advantage of the transaction. As the Illinois Supreme Court explained in Kerrigan v. Unity Savings Assoc., 58 Ill.2d 20 (1974), the duty of loyalty requires a director to tender a corporate opportunity to the corporation before the director can personally take advantage of the opportunity.

The BCA recognizes that the purpose of the duty of loyalty is to prevent the abuse of power and to ensure the fairness of corporate transactions in which the officer or director has a direct or indirect interest. While the law previously altogether precluded dealings between officers, directors, or controlling shareholders and their corporations, now the Illinois Supreme Court has explained that these insiders may deal with their corporations, provided that they fully discloses all pertinent information and acts fairly and in the best interest of the company.

Fiduciary duties generally terminate when the fiduciary relationship terminates, including when the officer or director is fired. Section 7.9 of the BCA, however, allows a shareholder in a close corporation (corporation with a limited number of shareholders) to terminate his or her fiduciary duties to the company by waiving his or her voting and management rights in the company.

Our Chicago breach of fiduciary duty and business litigation attorneys have defended and prosecuted minority oppression, business divorce, stolen corporate opportunity and breach of fiduciary duty lawsuits for more than three decades.

Super Lawyers named Chicago and Elmhurst business litigation and fiduciary duty attorneys Peter Lubin and Patrick Austrermuehle a Super Lawyer and Rising Star respectively in the Categories of Class Action, Business Litigation and Consumer Rights Litigation. Lubin Austermuehle’s Oak Brook and Chicago shareholder oppression lawyers have over thirty-five years of experience litigating complex class action, consumer rights and business and commercial litigation disputes. We handle emergency business lawsuits involving injunctions, and TROS, covenant not to compete, franchise, distributor and dealer wrongful termination and trade secret lawsuits and many different kinds of business disputes involving shareholders, partnerships, closely held businesses and employee breaches of fiduciary duty. We also assist businesses and business owners who are victims of fraud.

Lubin Austermuehle’s Wheaton, Naperville, and Oak Brook litigation attorneys have more than thirty-five years of experience helping business clients unravel the complexities of Illinois and out-of-state business laws. Our Chicago business divorce litigation lawyers represent individuals, family businesses and enterprises of all sizes in a variety of legal disputes, including disputes among partners and shareholders as well as lawsuits between businesses and consumer rights, auto fraud, and wage claim individual and class action cases. In every case, our goal is to resolve disputes as quickly and successfully as possible, helping business clients protect their investments and get back to business as usual. From offices near Aurora and Elgin, we serve clients throughout Illinois and the Midwest. If you’re facing a business or class-action lawsuit, or the possibility of one, and you’d like to discuss how the experienced Illinois breach of fiduciary duty attorneys at Lubin Austermuehle can help, we would like to hear from you. To set up a consultation with one of our Chicago class action attorneys and Chicago business trial lawyers, please call us toll-free at 630-333-0333 or contact us online.

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