Corporate directors and officers owe the corporation certain fiduciary duties, meaning they are legally obligated to act solely in the corporation’s interest. The duty of loyalty requires officers and directors to act on behalf of the corporation without economic conflict. A breach of the duty of loyalty might consist of a transaction that benefits an individual employee over the corporation, or a corporate opportunity that the employee withholds for their own benefit. Remedies for a breach of the duty of loyalty may include economic damages and an equitable remedy known as disgorgement, by which the employee must give up any personal gains obtained from their breach. The New Jersey Supreme Court recently considered whether a court could award disgorgement to a corporation that did not suffer economic loss. Kaye v. Rosefielde, No. A-93 Sept. Term 2013, 073353, slip op. (N.J., Sep. 22, 2015).
The plaintiff in Kaye hired the defendant in 2002 as Chief Operating Officer (COO) of several companies. Under a formal employment agreement, the defendant received an annual salary of $500,000, paid in equal parts by a corporation and a limited liability company (LLC) controlled by the defendant. The defendant served as COO and General Counsel of both companies, which managed and sold timeshares in properties owned by those two companies and several others.
According to the court’s ruling, the plaintiff alleged multiple acts by the defendant that breached the duty of loyalty to the companies that employed him. In one case, the defendant created a separate LLC in 2003 to manage certain timeshare interests, but he did not follow the plaintiff’s instructions regarding the allocation of ownership interests. The defendant drafted the new LLC’s operating agreement in a way that increased his own ownership interest and that of a corporation he owned and controlled. In 2005, the plaintiff learned of some of the defendant’s acts and terminated his employment.