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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 answer will depend upon (1) the country in which the company was formed, (2) the articles of association of the company, and (3) the terms of any shareholders agreement signed. – lellis Jan 23 '19 at 8:05
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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.

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  • Someone, especially not the party in question, on the board knowing is not the same as "the board has been notified". – George White Jan 19 at 18:40
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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.

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  • I'm not sure how having "conversations within the organization", which I assume means within the CEO's company, would violate a non-disclosure agreement, non-compete agreement, or the CEO's duty of loyalty. – Ross Ridge Sep 16 at 0:09
  • @RossRidge Sometimes it would, sometimes it wouldn't. It would depend upon the substance of the conservations, the nature of the matters disclosed, and the nature of the obligations of the CEO contractually. The implication in the question is that the current CEO might basically be taking actions to jump ship to another company taking advantage of business opportunities at the new firm for personal gain. Discussions like that often include due diligence inquires from the potential participants in the new deal (e.g. to show his qualifications and accomplishments). – ohwilleke Sep 16 at 0:13
  • I thought the question was clear in that the CEO wanted to "step down" into a different role in the same company, as your first paragraph seems to acknowledge. I don't see any implication of the CEO wanting to jump ship. – Ross Ridge Sep 16 at 0:21

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