Legal Risk Management Canada
Legal Risk Management Canada
Many organizations, both small and large, face numerous challenges in maintaining their business clients and sustaining their operations following the departure of their key officers. Because these important employees are often responsible for taking care of prime customers and essential personnel, both the companies and the leaving employees are usually concerned with delineating their pre-termination dealings. With regard to Canero’s lawsuit against Terra Surveys Limited on grounds that O’Malley and Zarzycki had breached their fiduciary duty, it is imperative to note that in the absence of fraud, limiting or restraining agreements, or the improper acquisition of confidential customer lists, former employees are free to compete with their previous employer and seek business from former customers. However, there should be no provable business activity by the said former employees prior to the termination of their employment.
The conventional fiduciary analysis is straightforward. Employees at all times contract to align personal interests with those of their employer and, therefore, gain access to the assets and information for the sole purpose of discharging their duties to the employer. Since this access is taken to be limited to its application insofar as work performance is concerned, employees attract concurrent status fiduciary accountability. Their engagement with the employer must not be compromised through timeserving impulse.
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The generic substance of fiduciary duty of employees includes two principal provisions, namely the provision relating to the exploitation of confidential information obtained from the employer and that relating to competing with the employer during active employment. However, notwithstanding these obligations, whether an individual utilizes information obtained in the course of employment can only be ascertained by determining whether the information in question is a “know how” gained by the employee during employment, a “trade secret,” or simply a “trivial” information.
From the perspective of the employer, the trade secret is equivalent to a golden ticket. A trade secret refers to information that, if made known to a competitor, exposes the owner of the secret to considerable harm. Naturally, employees are barred from utilizing such information during employment except for furthering their employer’s interests. Nevertheless, the law also prevents employees from using such information after they have left employment, whether or not a contractual agreement between the ex-employer and the former employee exists to restrict such use. From the foregoing, it should be apparent that O’Malley and Zarzycki were in breach of their fiduciary duty. This is not a complicated or controversial issue given the circumstances. The two parties utilized the information they had collected while representing Canero to the detriment of the company, as well as to gain advantage for themselves.
It is reasonable to assume that the decision of the two to resign from Canero to form Terra Surveys Limited, which was to do the same kind of work as Canero, was informed by the information gathered while working for Canero that was the result of the trade secrets learned while working for Canero. Concerning the provision relating to competing with the employer during active employment, it should be apparent that aside from a breach of confidence by O’Malley and Zarzycki, there is no fiduciary breach since the two are no longer in active employment with Canero. In sum, O’Malley and Zarzycki anticipated an opportunity to use the information acquired while working for Canero to gain advantage for themselves. Therefore, the two are without a doubt in breach of their fiduciary duty and Canero is entitled to profits earned as a result of the contract between Terra and the Guyana government.
Under corporate law, the board of directors must discharge two principal fiduciary duties, namely the duty of care and the duty of loyalty. The former dictates that directors must make business decisions anchored in all available material information. It also requires the board to act in an informed and deliberate manner. First, it must act to safeguard the interests of the company and in good faith. Second, the board must believe its actions to be promoting the company’s best interest according to a reasonable analysis of the presented options. The duty of loyalty, however, imposes an affirmative duty on the directors to safeguard the interests of the company and desist from any conduct that could harm the company and its shareholders. In this regard, the directors are required to avoid conflicts between self-interest and duty by giving complete and undivided allegiance to the best interest of the corporation.
From the foregoing, it should be evident that liability for the breach of fiduciary duty is suspect in this scenario. To find the senior management and directors liable, the plaintiffs would have to demonstrate beyond reasonable doubt that the individuals acted with a mental state that is conflicting and disloyal to their duties and responsibilities to the company. Directors have a fiduciary duty to act honestly and in the best interest of the corporation, and they will be held strictly liable only in the event that they fail to meet this duty. The facts of the case are that the bank failed to detect the discrepancies in Iguchi’s forged statements, and that even after Iguchi sent a letter to the bank’s head office in Japan in July 1995, the bank did not notify the Japanese authorities until a month later. Still, the bank waited until September to inform America authorities and the bank’s stockholders.
The explanation seems reasonable and valid because even though Iguchi sent a letter revealing the situation, the available information does not disclose the exact contents of the letter. It is likely that Iguchi might have failed to reveal the true scope of the situation, and given the fact that he had concealed the loses for more than a decade, the management merely exercised discretion in attempting to determine the true proportion of the situation before disclosing it to the shareholders. The fiduciary duty of care dictates that an officer or director cannot be held liable for decisions undertaken with reasonable care and in good faith whenever such decisions turn out to be injurious to corporate interests. It is not evident that the senior management or directors showed gross negligence in their decision-making process.
The decision by the senior management to issue the preferred shares in one of its affiliated companies did not go in any way against the best interest of the company. In addition, the senior management merely exercised their discretion when it delayed informing the Japanese and American authorities and the shareholders on the goings-on. It is reasonable that the management required some time to establish the true scope of Iguchi’s actions. Without evidence that the directors and the bank’s senior management consciously participated in what could be construed as a breach of the stock action plan and the fiduciary duty of care, the plaintiffs may be unable to surmount this difficult burden. Therefore, the action should not succeed.
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