Incorporations, fiduciary duties arise from the agency theory whichplaces the managers or executives as agents serving the interests ofthe shareholders. Consequently, the managers of a corporation mustact in the best interests of the shareholders. To this end, they mustendeavor to increase shareholder value through enhancingprofitability (Hecker, 2013). In the case study, Jimmy and Jonny hada personal relationship, besides being executives of two companiesinvolved in an acquisition transaction. By colluding to inflate thevalue of Television Inc. by $480 million, they were in breach oftheir contractual obligations to the shareholders. In effect, thefollowing discussion explores whether Jimmy was indeed liable forviolating the fiduciary duty of loyalty as sued by one of theshareholders of News Corp.
Theduty of loyalty is the most important fiduciary obligation ofdirectors and executives. The concept is that the decision makerswithin an organization should act in the best interests of theshareholders and not their personal benefits (Hecker, 2013). In thisregard, Jimmy violated the trust bestowed on him by the shareholderswhen he agreed to collude with Jonny to inflate the assets ofTelevisions Inc. Besides, he was legally obligated to scrutinize thefinancial statements of Televisions Inc. and inform the board of anydiscrepancies in financial reporting. It is, therefore, valid toargue that the shareholder is right about his decision to sue Jimmyon the grounds of breaching the fiduciary duty of loyalty (Miller,2013).
Anotherrequirement of the fiduciary duty of loyalty is that the agent islegally obligated to inform the principal of any material informationrelating to a transaction (Miller, 2013). To this end, Jimmy ought tohave made three material disclosures to the board. One, his son wasan executive at Televisions Inc. Two, there were discrepancies in thefinancial statement of Televisions Inc and, three, no fundamentalfactors were warranting an acquisition of Television Inc. at $500million. Because Jimmy failed to make these disclosures, he islegally liable for breach of fiduciary duty of loyalty as sued by theshareholder (Warburton, 2014).
Inobservance of the fiduciary duty of loyalty, directors should avoidconflicts of interests in negotiating for business transactions. Therequirement outlines that the manager of a corporation must refrainfrom self-dealing or engaging in business transactions which mightlead to deliberate personal profits (Warburton, 2014). Also, thedirector must avoid transactions where he/she can be coerced to enterinto an agreement that puts the firm and the shareholders at adisadvantage. However, in the case that an executive has an interestin another organization which is in business with the parentorganization, the manager must inform the board of the same. Failureto meet any of these requirements constitutes a breach of fiduciaryduty of loyalty (Rose, 2016).
Inlight of the above obligations within which Jimmy was supposed tooperate, it is evident that he violated virtually all of them.Through consenting to the process of inflating the acquisition valuefor Televisions Inc., it is clear that he was to get personal profitsfrom his relationship with Jonny who is his son. Also, beforecommencing negotiations on the acquisition, he failed to inform theboard that he had a blood relationship with Jimmy which would havetilted the negotiation to the disadvantage of the shareholders. He,therefore, deliberately engaged himself in a conflict of interestwhich makes him legally liable to the shareholders for breach offiduciary duty of loyalty (Rose, 2016).
Inregards to the legal suit against the board of directors, theshareholder is wrong because the board conducted its due diligence inthe process and was misled by the clever forgeries (Hecker, 2013).The due diligence was in conformity with the expectations of thefiduciary duty of care which places the burden of due diligence onthe board of directors. In performing their duties, the boarddiligently examined the transaction as was legally required (Hecker,2013).
Tosum up, the discussion shows that the case of shareholder againstJimmy on breach of fiduciary duty of loyalty has legal merits. Jimmyfailed to adhere to his contractual agreement where is he is supposedto serve the best interests of the shareholders. However, the caseagainst the board of directors of breach of fiduciary duty of carelacks legal merits because they made their due diligence anddiligently examined the transaction.
Hecker,E. (2013). in Business Entities Revisited. KansasLaw Review,61(5),54-61. http://dx.doi.org/10.17161/1808.20240
Miller,P. (2013). Justifying . McgillLaw Journal,58(4),969. http://dx.doi.org/10.7202/1019051ar
Rose,S. (2016). What Does “Governance” Mean?. Governance,30(1),23-27. http://dx.doi.org/10.1111/gove.12212
Warburton,J. (2014). Do fiduciary duties matter?. CorporateGovernance: The International Journal Of Business In Society,12(6),541-548. http://dx.doi.org/10.1108/14720701111176957
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