Corporate executives and other high-level corporate employees have fiduciary duties to the corporation. These duties require, among other things, that the interests of the corporation be foremost and put before those of the individual. But there are questions as to how far this duty extends. A recent case, Mazak Corporation v. William King, decided by the Sixth Circuit considered whether a corporate executive breached his fiduciary duty where he had an undisclosed interest in a noncompeting company.
William King was Mazak’s vice president and controller from 1990 to 2005. He was directed to explore options to establish a financing subsidiary that would provide financing for the sale of the company's equipment to customers. Toward that end Mazak and another company, United International, formed Mazak Financial Group, which between 1998 in 2003 successfully financed millions of dollars in Mazak equipment sales.
While he was still employed by Mazak, King acquired ownership interests in both United and a third company, which provided subcontractor services to Mazak. These ventures were very successful as King received $1,510,738 in distributions from United, profit-sharing contributions of $133,537 and distributions from the subcontractor totaling $204,346. One of King’s subordinates at Mazak, Timothy Fisher, received similar distributions from United.
After King left employment at Mazak the company learned of his interests in United and the subcontractor and sued him for fraud and breach of fiduciary duty among other things. The district court entered judgment in Mazak’s favor for $3,472,896, representing the total monies received by King and by Fisher from these other companies.
King appealed the judgment to the Sixth Circuit and argued that his fiduciary duty to Mazak did not require him to disclose his interests in United or the subcontractor since they were not competitors of Mazak’s. The court rejected this argument based on the following points:
- under Kentucky law, when an employee "is aware of the conflict between his private interest in the corporate interests, he owes the duty of good faith and full disclosure of the circumstances to the corporation."
- "If dual interests are to be served, the disclosure to be effective must lay bare the truth, without ambiguity or reservation, and all of its stark significance."
- A corporate executive's failure to disclose the nature and extent of his involvement with an independent contractor violates his fiduciary duties
- Actual damage to the corporation is not required to recover for breach of fiduciary duties.
- An employee who obtains a secret profit "will be required to account to his employer or principal for any benefit received by him in violation of his duty though it does not appear that the principal has suffered any actual loss by fraud or otherwise."
