Lincoln Stores, Inc. v. Grant - 309 Mass. 417, 34 N.E.2d 704 (1941)

Rule:

Directors or officers of a corporation are not, by reason of the fiduciary relationship they bear toward the corporation, necessarily precluded from entering into an independent business in competition with it, but in doing so, they must act in good faith.

Facts:

Plaintiff, Lincoln Stores, Inc., brought a bill in equity to enjoin defendants, Grant, Martin, and Haley, from operating a store similar to those of the company and from making use of information acquired by them while they were officers and employees of the company. An accounting also was sought for the purpose of determining what damage the plaintiff had sustained by reason of the alleged unfaithful acts of said three defendants. Thereafter, by amendment, the bill sought to have a constructive trust declared of the shares owned by Grant, Martin and Haley of the capital stock of the Connecticut corporation that was operating a store in alleged competition with one owned and operated by the plaintiff. The Superior Court (Massachusetts) ordered the defendants to pay damages to the company. Plaintiff appealed.

Issue:

Under the circumstances, should a constructive trust be established?

Answer:

No.

Conclusion:

The court found that no duty whatever rested upon the two directors or buyer to acquire the competitor's stock directly for the company so there was no breach of a specific, as distinguished from a general, duty in acquiring it for themselves. The competitor's store was not essential to the company, and it was something in which the company had no interest or expectancy. It was true that the two directors and buyer made use of information that they had obtained while in the employ of the company. However, it seemed that the information was used not for the purpose of acquiring the competitor's stock as something that would be valuable to the company, but rather for the purpose of operating the store after it had been acquired. The establishment of a constructive trust was not warranted as to the capital stock of the competitor's company. The conduct of the two directors and buyer in acquiring the stock transformed a noncompetitive store into one that was in active competition. The wrong arose not out of the acquisition of the store but in the operation of the business.