Timing of foul play irrelevant
Ron aldGoe gan, a senior vice-president 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, Go egan 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 hi s 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.
YOU’RE HUMAN; IT MIGHT SLIP. MISTAKES HAPPEN. THE MORE IMPORTANT PART IS HOW YOU HANDLE IT AFTERWARD. SOME PEOPLE OPT FOR LEVITY AND BRUSHING IT OFF LIGHTLY. YOU CAN NEVER GO WRONG WITH OWNING UP TO YOUR FAULTS. — SHARON SCHWEITZER