The Cost of Infidelity

In my post on February 1, 2011, I wrote about the benefits of dating before one gets married. I was writing specifically to warn against the danger of inviting someone into your company as shareholder or director based solely on hope or expectation. My strong recommendation was (and always has been) to work with the person, see how s/he:

  • Reacts under pressure
  • Interacts with company personnel
  • Affects the general work environment
  • Works on a day-to-day basis
  • Actually performs the job you s/he has been brought on to do.

Only after “dating” can a business owner be even reasonably certain of the advisability of a long-term relationship.

But that’s not the end of the company-as-marriage analogy. There is still infidelity to deal with.

When one participates in a company, as an owner, officer, director, or even some other variety of “managing agent,” the laws of most states impose certain duties on that person. Chief among them is the “duty of loyalty.” One would think, just as with marriage vows, that one would only breach the duty of loyalty at one’s own peril.

In life, there are always temptations. In business, that temptation takes the form of the desire to take more (or all) of a good deal for oneself rather than sharing the proceeds with others. Sometimes, the thought occurs with the possibility of landing a large, new contract or upon hearing of a tremendous sales opportunity.

“Maybe,” the thought goes, “I could set this one up outside the company and triple what I would otherwise get in commission or draw.”

Possible. Sometimes, to be sure. But what of those left on the outside looking in?

Maryland Law, like that of most other states, has made actionable what is known as a “breach of corporate opportunity.” This means, in effect, that one may be held liable to compensate the corporation for the improper taking (some would say “theft”) of a business opportunity that rightfully belonged to the company.

Let’s assume that Susan Smith was a shareholder and vice president of ABC Janitorial Corporation. Upon seeing an opportunity for a large contract on the horizon, Susan set up a new company with her husband called DEF Cleaning. DEF then snared the contract for itself. In so doing, it wrongfully claimed one of ABC’s opportunities for itself.

The long and short of it is that Susan, as a co-owner and officer of ABC, owed ABC something better than just her full-time, physical presence. She owed ABC her loyalty. When she decided to deprive ABC of an opportunity that rightfully belonged to it, she committed the corporate equivalent of adultery.

And in business, just like in marriage, there is usually a price to pay.

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