Corporate directors and officers owe a fiduciary duty to the corporation and its shareholders to act in the corporation’s best interest. This is commonly known as the “duty of loyalty.” A breach of this duty may expose both the individual officer or director and the corporation itself to liability to the shareholders. Allegations against the former chairman and chief executive officer of a large New York City media company have led to a discussion of whether this individual might have breached the duty of loyalty in connection with an ongoing scandal. While it is important to note that these are only allegations, the ongoing story provides a useful demonstration of the duty of loyalty, as well as a possible defense to a claim of breach.
Under New York law, corporate officers, directors, and majority shareholders are considered “guardians of the corporate welfare.” Alpert v. 28 Williams Street Corp., 63 N.Y.2d 557, 568 (1984), quoting Leibert v. Clapp, 13 N.Y.2d 313, 317 (1963). Even if a particular action does not violate any specific law, it might violate the duty of loyalty if its purpose is “the aggrandizement or undue advantage of the fiduciary to the exclusion or detriment of the stockholders.” Alpert, 63 N.Y.2d at 569.
“Self-dealing” is a common example of a breach, such as when an officer or director has a significant financial interest in a corporate transaction and prioritizes their own interests over those of the corporation. An officer or director can avoid legal liability if they disclose the conflict of interest to the corporation ahead of time and receive approval from a majority of disinterested directors or shareholders. See N.Y. Bus. Corp. L. § 713.
In order to establish that a particular action, series of actions, or omission of action violated the duty of loyalty, a shareholder must overcome the “business judgment rule.” This rule holds that a court will not interfere with decisions made by directors and officers in the ordinary course of business if they acted in good faith and with reasonable care for the corporation’s best interests. Clearing the hurdle of the business judgment rule often requires evidence of fraud or gross negligence. See Auerbach v. Bennett, 47 N.Y.2d 619 (1979); Aronson v Lewis, 473 A.2d 805 (Del. 1984).
The media company that operates the Fox News television network is facing multiple allegations of sexual harassment by its now-former Chairman and CEO, who stepped down from those positions in July 2016. As current and former employees have come forward with accusations of sexual harassment, accounts of other alleged acts by the former CEO have also come out. These include allegations that he used corporate funds “to hire consultants, political operatives, and private detectives who reported only to him” and that he employed these people “to conduct PR and surveillance campaigns” targeting journalists who had been critical of him.
The question that arises from these allegations is whether it could expose the former CEO to liability to the corporation’s shareholders for a breach of the duty of loyalty. The answer largely depends on whether these alleged activities, which could reasonably be described as self-interested, harmed the shareholders’ interests or helped them.
Business formation attorney Samuel C. Berger practices in New York City and Northern New Jersey. We offer a wide variety of fixed-fee legal-service packages to our clients, who include entrepreneurs, small business owners, and businesses. To schedule a confidential consultation with a member of our team of business advocates, contact us today online, at (201) 587-1500, or at (212) 380-8117.
More Blog Posts:
New York Court of Appeals Applies “Business Judgment Rule” in Shareholder Suit Against Corporation, New York & New Jersey Business Lawyer Blog, July 7, 2016
Issuance of Preferred Stock in Family Businesses to Shareholders Who Actively Participate in the Business, New York & New Jersey Business Lawyer Blog, April 14, 2014
Person Assuming Management of Family Business Does Not Assume Liability for Predecessor’s Business Torts, According to New York Court, New York & New Jersey Business Lawyer Blog, September 26, 2013