Question

Ethics Lawrence Gaffney was the president and general manager of Ideal Tape Company (Ideal). Ideal, which was a subsidiary of Chelsea Industries, Inc. (Chelsea), was engaged in the business of manufacturing pressuresensitive tape. Gaffney recruited three other Ideal executives to join him in starting a tape manufacturing business. The four men remained at Ideal for the two years it took them to plan the new enterprise. During this time, they used their positions at Ideal to travel around the country to gather business ideas, recruit potential customers, and purchase equipment for their business. At no time did they reveal to Chelsea their intention to open a competing business. The new business was incorporated as Action Manufacturing Company (Action). When executives at Chelsea discovered the existence of the new venture, Gaffney and the others resigned from Chelsea. Chelsea sued Gaffney and the others to recover damages. Chelsea Industries, Inc. v. Gaffney, 389 Mass. 1, 449 N.E.2d 320, Web 1983 Mass. Lexis 1413 (Supreme Judicial Court of Massachusetts)
1. What is the fiduciary duty of loyalty?
2. Did Gaffney act ethically in this case?
3. Did Gaffney and his partners breach their fiduciary duty of loyalty?

Answer 1

Answer:

Fiduciary Duty

1. The two main duties of company directors and top managers are the duty of care and the fiduciary duty of loyalty.  The fiduciary duty of loyalty requires that managers act in the best economic interest of the company without engaging in activities that give rise to personal economic conflict.

2. Gaffney did not act ethically in this case.  He did not avoid conflict of interest as an officer of Chelsea Corporation.

3. Gaffney and his partners clearly breached their fiduciary duty of loyalty.  Within the two years of their employment at Ideal Tape Company, they acted in their personal interest.  They were using company resources to conduct researches, setting up a rival company to compete with Ideal.

Explanation:

When a fiduciary duty of loyalty is breached, the corporation can  damages.  The court will usually base the damages on the salaries of the officer who breached his fiduciary duty within the application period.