Fiduciary obligations are crucial aspects of certain business relationships. These duties involve a relationship between two parties that obligates one to act in the best interest of the other. When the fiduciary breaks or breaches this obligation to the beneficiary, it can hurt their reputation and have potential legal repercussions. Such is the case for popular fashion brand Kate Spade, which found itself in a recent lawsuit over allegedly breaching its fiduciary duty to its shareholders.
Kate Spade shareholders claim that in 2015 the brand was in the middle of successfully executing a CEO-backed plan aimed to increase its top-line sales more than three times over. This plan ultimately caught the attention of another popular fashion brand, Coach, which submitted a 2016 proposal to acquire Kate Spade for $22.00 per share in cash at a 37% premium. Kate Spade’s board initially rejected the offer; however, the critical activist investors pressured the board to pursue a sale.
According to the class action lawsuit in the Delaware Court of Chancery, the activist investors caused Kate Spade to backtrack with Coach, ultimately approving the sale to Coach owner Tapestry. The sale to Tapestry was finalized in July 2017 in a $2.4 billion deal. Shareholders allege this decision put Kate Spade’s “personal interests ahead of the interests of stockholders.”
Shareholders ultimately claim the board deprived them “of the true and fair value of their investments in Kate Spade,” breaching its “fiduciary duties of care, loyalty, and good faith owed to the stockholders,” by failing to ensure stockholder value was optimized in the sales process while “reaping disproportionate benefits” for itself.
Breaching Fiduciary Care, Loyalty, and Good Faith of Shareholders
Typically, corporate directors and officers owe fiduciary duties to the company and its shareholders. The board of directors establishes company policies and delegates certain duties to corporate officers who carry out daily business operations. Fiduciary duties may also apply to controlling shareholders who possess a majority interest and thus can exercise control over business activities.
Duty of Care
In a fiduciary duty of care, both officers and directors are expected to use appropriate care and diligence when acting on behalf of their corporation. This includes exercising reasonable discretion in carrying out their duties in order to advance the best interests of the company. For instance, violating a duty of care can occur when an officer or director fails to undertake a reasonable review of a corporate matter or fails to adequately supervise staff in a way that damages the business.
Duty of Loyalty
Officers and directors owe a duty of loyalty to the business and its shareholders. Within this duty, they are expected to put the welfare and best interests of the company above their own personal or other business interests. Conflicts of interest, competing with the corporation, and/or making secret profits from business dealings can all rise to the level of breaching the fiduciary’s duty of loyalty.
Duty of Good Faith
A duty of good faith is closely aligned with the duties of care and loyalty. Under this duty, officers and directors must act with honesty, integrity, good faith, and fairness when handling corporate obligations. This continuing duty runs applies to daily tasks and business operations. Following procedures within the Texas Business Organization Code or codifying them in a shareholder agreement can help ensure obligations are met.
Houston Commercial Litigation Attorneys
Fiduciary duties should protect the integrity of a business and its employees and shareholders. When these duties are not met or breached, it can have a rippling effect that damages the reputation of the company as a whole. At Feldman & Feldman, we know how serious these obligations are and understand the complexities involved in commercial litigation. If you are facing a business dispute that requires the insight of an experienced commercial litigation attorney, contact us today to see how we can help.