FIDU­CIARY OF­FI­CERS’ DUTY IS TO COM­PANY, NOT THEIR WAL­LETS

Court con­cludes dis­clo­sure of con­flicts of in­ter­est is ab­so­lute, writes Howard Le­vitt.

Edmonton Journal - - FINANCIAL POST -

Ron­ald Goe­gan, a se­nior vi­cepres­i­dent and the chief fi­nan­cial of­fi­cer of Royal Group, was told of an opportunity to pur­chase land near Royal Group’s head­quar­ters. He ap­proached Royal’s CEO and ma­jor­ity share­holder, Vic De Zen, about whether the com­pany was in­ter­ested in pur­chas­ing this land.

Royal Group de­clined. But De Zen and two other ex­ec­u­tives pur­chased the land per­son­ally and resold it to Royal Group, mak­ing a sev­eral-mil­lion dol­lars profit. Goe­gan acted for Royal Group in its pur­chase of the land from De Zen and made no per­sonal profit.

How­ever, as the most se­nior em­ployee act­ing for Royal Group in the trans­ac­tion, he also failed to per­form any due dili­gence to en­sure that Royal Group did not over­pay its CEO in pur­chas­ing the land. A spe­cial com­mit­tee of the board of di­rec­tors was struck to in­ves­ti­gate Royal Group’s trans­ac­tions. When it learned of this land deal, Goe­gan and oth­ers were ter­mi­nated for cause. He sued, al­leg­ing that he had done noth­ing wrong and had made no profit from the other ex­ec­u­tives’ ac­tiv­i­ties.

Jus­tice My­ers of the On­tario Su­pe­rior Court had a dif­fer­ent view. He found that Goe­gan had breached his fidu­ciary duty in fail­ing to dis­close this con­flict of in­ter­est to the in­de­pen­dent di­rec­tors of Royal Group.

Af­ter Goe­gan’s dis­missal, Royal Group dis­cov­ered that he had also par­tic­i­pated in mis­ap­pro­pri­at­ing a cor­po­rate as­set. Royal Group had ar­ranged for a joint ven­ture with a com­pany, Prem­dor, which was struc­tured as the sale of a Royal Group sub­sidiary to Prem­dor. Part of Prem­dor’s pur­chase price were op­tions al­low­ing Royal Group to pur­chase 200,000 shares of Prem­dor at $13.25.

Three per cent of those op­tions were al­lo­cated by De Zen to var­i­ous ex­ec­u­tives, in­clud­ing Goe­gan, in lieu of a bonus. When the share price went over $13.25, Goe­gan sold his por­tion of the shares for a profit of al­most $200,000.

To jus­tify his profit, Goe­gan claimed that th­ese op­tions for 200,000 shares were never ac­tu­ally part of the pur­chase price but were al­ways meant to be held for se­nior ex­ec­u­tives as part of their com­pen­sa­tion. Jus­tice My­ers found this not to be cred­i­ble. By adding the op­tions for the Prem­dor shares as a bonus, Goe­gan ended up with a higher bonus than the bonus struc­ture of Royal Group per­mit­ted. Any change to that struc­ture re­quired share­holder ap­proval, which was never sought or granted.

The court found that this was ef­fec­tively the ap­pro­pri­a­tion of Royal Group’s shares in Prem­dor by the ex­ec­u­tives.

Sev­eral im­por­tant prin­ci­ples arise from this de­ci­sion:

It is ir­rel­e­vant whether a fidu­ciary ■ em­ployee — i.e. a se­nior ex­ec­u­tive in which the com­pany re­poses trust — prof­its from a con­flict of in­ter­est. Fidu­cia­ries have du­ties of loy­alty, fidelity and can­dour, which re­quire them to dis­close all con­flicts of in­ter­est and to re­veal any mis­ap­pro­pri­a­tion of cor­po­rate op­por­tu­ni­ties that come to their at­ten­tion. This duty of dis­clo­sure is an ab­so­lute one.

Al­though Goe­gan did not profit from the land flip, his fail­ure to dis­close it to the in­de­pen­dent di­rec­tors was a breach of his fidu­ciary du­ties. Dis­clos­ing it to the CEO and ma­jor share­holder, De Zen, was in­suf­fi­cient as De Zen was per­son­ally prof­it­ing. He had an obli­ga­tion to re­veal his su­pe­rior’s im­pro­pri­ety.

The fact that se­nior ex­ec­u­tives ■ in­volved in the trans­ac­tion ap­proved the land flip did not save Goe­gan.

“The law can­not al­low a faith­less fidu­ciary to ap­prove his own mis­con­duct,” the judge wrote.

Mis­ap­pro­pri­a­tion of cor­po­rate ■ as­sets is also cause for dis­charge.

The tim­ing of Royal Group’s ■ dis­cov­ery of Goe­gan’s mis­con­duct re­spect­ing the op­tions was im­ma­te­rial. The fact that cause is dis­cov­ered af­ter an em­ployee’s dis­missal is ir­rel­e­vant. Hid­ing the mis­con­duct does not pro­vide the em­ployee with any ad­van­tage.

Even if the em­ployer is un­will­ing ■ to ac­quire or is in­ca­pable of ac­quir­ing an opportunity, it does not au­to­mat­i­cally al­low a fidu­ciary to do so. To ac­cept an opportunity of­fered to your em­ployer, the ex­ec­u­tive must (a) make full dis­clo­sure and (b) re­ceive in­formed con­sent of the em­ployer be­fore he or she can per­son­ally ac­quire it. Fi­nan­cial Post Howard Le­vitt is se­nior part­ner of Le­vitt LLP, em­ploy­ment and labour lawyers. He prac­tises em­ploy­ment law in eight prov­inces. Em­ploy­ment Law Hour with Howard Le­vitt airs Sun­days at 1 p.m. on New­stalk 1010 in Toronto. His most re­cent book is War Sto­ries from the Work­place: Col­umns from Howard Le­vitt by Thom­son Reuters. hle­vitt@levit­tllp.com Twit­ter.com/HowardLe­vit­tLaw

GETTY IM­AGES/ISTOCKPHOTO

Ron­ald Goe­gan, who lost his job as an ex­ec­u­tive at Royal Group, did not profit from the land deal, but an On­tario jus­tice found his fail­ure to dis­close it to the in­de­pen­dent di­rec­tors and the mis­ap­pro­pri­a­tion of cor­po­rate as­sets breached his fidu­ciary du­ties.

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