Suppose a startup has three directors on the board, two co-founders and the main investor.
The CEO (one of the co-founders) wants to step down and take a VP position. The CEO has started to have conversations within the organization about his plans but the board has not been notified.
Should discussions like this be disclosed right away to the board? Are there any legal ramifications of not doing so?
The board has been notified - the CEO is on the board and he knows so legally, the board knows and the company knows.
The CEO owes a fiduciary duty to the other members of the board (and the company) to act in their best interests. He must inform them when their interests could be damaged by failing to do so.
The Board's approval is needed for the act to happen. The CEO must tender his resignation to the Board for it to be effective, and must receive board permission to be appointed as VP.
To the extent that the CEO is merely thinking about doing something, there is probably no duty to disclose it. The duty would arise if some conduct prior to requesting board action was somehow inconsistent with the CEO's duties.
The CEO has started to have conversations within the organization about his plans but the board has not been notified.
Usually, there would be some express provisions in an employment contract, in a separate non-disclosure and/or non-competition agreement, or in the bylaws of the company, setting forth the obligations of the CEO with respect to disclosing information to third parties and pursuing opportunities now shared with the company.
In the absence of such an agreement, the CEO owes a duty of loyalty to the company, not to compete with it, or to harm it with disclosures of confidential information while still employed as an agent or officer of the company. This duty would be substantially similar for a CEO, a VP and a director, unless there are expressly legal documents providing otherwise and authorizing the conduct.
Usually, there is a duty while owing an unqualified duty of loyalty to a company to make any business opportunity that the company could benefit from or utilize to the company, and to obtain its permission to benefit personally instead from the opportunity, before using it for one's own personal gain.
Breach of a duty of loyalty is a legal basis for disgorgement of all compensation paid to the person owing the duty during the period of disloyal conduct, would be grounds for termination of a contract for cause that might not be possible to terminate as swiftly without cause, and would potentially give rise to a claim for damages suffered by the company (if any could be proven, either in terms of lost opportunity or actual harm) that can be proven to have been caused by the disloyal conduct.
Failure to disclose this in a publicly held company, or in connection with a private offering of securities could be considered to be securities fraud if knowledge of these discussions is material to the value of the security.
