A fiduciary duty is a legal obligation that requires individuals in positions of trust, such as trustees or lawyers, to place the interests of the person or entity they serve ahead of their own personal interests. The duty is fundamental to maintaining integrity within these relationships. In the corporate context, directors are expected to prioritize the interests of the corporation over their own personal gains. This means they must avoid conflicts of interest and refrain from engaging in activities that could benefit them at the expense of the corporation.
Every so often, you come across an older case that makes that point clearly and concisely. With full credit to the faculty of Osgoode Hall Law School's recent seminar on Shareholder Disputes and the Closely-Held Company, which directed me to this case, Georgakakos v. Georgakakos, 2020 ONSC 2256 [Georgakakos], is just such a case. It highlights the importance of a director's fiduciary duty to avoid self-dealing and the consequence of breaching that duty.
The Core Issue: Self-Dealing
The core issue in the case involved self-dealing, a situation where a fiduciary acts in their own interest rather than in the interest of the entity or individual they are supposed to serve. Angelo Georgakakos, a director of AG Holdings Niagara Inc. ("AG"), was found to have engaged in self-dealing by redirecting a corporate opportunity for personal gain. Instead of allowing AG to purchase shares in Riverview Poultry Limited, Angelo arranged for his own company, Woodland Poultry Ltd., to acquire the shares. Later, Woodland sold the shares to AG at a significant profit, which Angelo personally benefited from.
The Divisional Court found that Angelo's actions constituted a breach of his fiduciary duty. As a director of AG, Angelo was obligated to act in the best interests of AG, but his self-dealing diverted profits that should have been realized by AG. The panel emphasized that self-dealing is prima facie a breach of fiduciary duty because it inherently involves a conflict of interest where the fiduciary's own financial interests are placed above those of the corporation.
Easy to Forget in Smaller, Closely Held Corporations
Georgakakos is a reminder for corporate directors, particularly in closely-held family companies where positions and interests can become blurred, about the importance fulfilling their fiduciary duties. Full disclosure of any potential conflicts of interest is essential. Even where the director thinks the corporation may not otherwise pursue the opportunity, the correct step is to disclose the opportunity to other corporate stakeholders. Those other stakeholders should then make the decision on their own, without input from the conflicted director and with knowledge of that director's conflict. If these steps are followed, and the opportunity truly is one which the corporation is not interested in pursuing, there will be no prejudice to the company or to the conflicted director.
A director's failure to uphold their fiduciary duty to the corporation can lead to significant financial consequences. In Georgakakos, the court required Woodland to repay the entire $1.2 million profit Angelo made on the transaction.
The Take-Away: Assume Nothing
Maybe the most interesting part of Georgakakos is that the decision of the Divisional Court on appeal reversed the applications judge at first instance. Despite making all the factual findings necessary to establish that Angelo had placed his interests ahead of AG's, the applications judge did not hold that Angelo had breached his fiduciary duty to the company.
In that sense, Georgakakos also stands as a stark reminder that even lawyers can misunderstand the clearest case of fiduciary breach. As always, it is the role of sophisticated litigation counsel to ensure that the court is properly educated on the applicable concepts when presenting their client's case.
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