Legal Question in Business Law in California

fiduciary duties, conflict of interest

Hi,

I've started a company with 3 other individuals. We are an S-Corp. 2 of the shareholders/officers are married and the other 2 are partners in another business (myself and one other partner). Our other business is a graphic design business and one of the things we design is greeting cards. The new business we started with our partners is an online greeting card company. They have known about our line of business and it was one of the reasons we got into business together. Now they are saying that because we design cards for other web sites we are breaching our fiduciary duties. We are arguing that we are not because they always knew that this is what we were doing and we are not competing with the new company the web site owners are competing, we are just a vendor on their sites. Who is right and any suggestions on how to resolve this?

Thanks.

Asked on 5/12/08, 8:03 pm

1 Answer from Attorneys

Gregg Gittler GITTLER & BRADFORD
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Re: fiduciary duties, conflict of interest

You have raised interesting issues that are usually addressed in such things as shareholder agreements or LLC operating agreements among the members. Generally, an officer of a company has a fiduciary duty to the company, including an obligation regarding company business opportunities. However, where you had a known, pre-existing business which you were clearly not bringing into your company, such activity may, by implication, be excluded. The issue becomes cloudy, however, if your existing greeting card business grew to a point where it interfered with your on-line greeting business.

You should engage counsel (such as ourselves) to draft a shareholders' agreement spelling out what activities are, and are not, within the corporation, and what activities in which the shareholders may or may not engage in competition with the company. (Another idea is to incorporate your greeting card business into your new corporation, with perhaps the new shareholders adding capital to keep the interests equal).

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5/14/08, 5:24 pm

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