The Case of Jimmy and Johnny
Jimmy is the CEO of News Corp. His son, Johnny, runs Television Inc. One day Jimmy suggests that Johnny sell Television Inc. to News Corp. Jimmy and Johnny work together to radically inflate the value of Television Inc. Jimmy brings a proposal to the Board of Directors to buy Television Inc. for $500 million dollars even though the corporation is only worth $2 million. The board of directors diligently examines the transaction, but due to clever forgeries, the board does not discover the radical inflation of the corporation. Jimmy never discloses his relationship with Johnny. The sale goes through, and it is shortly discovered that Television Inc., is practically worthless.
- A shareholder sues alleging that Jimmy violated his fiduciary duty of loyalty.
- Additionally, the shareholder claims that the directors violated their fiduciary duties of care.
- Is the shareholder correct?
- Assignment: Read the case and apply the fiduciary duties of loyalty and care. Briefly discuss both duties.
- Was Jimmy guilty of violating his duty of loyalty? Why or Why not?
- Were the directors guilty of violating their duty of care? Why or Why not?
Fiduciary Duties – The Case of Jimmy and Johnny Questions Answered
The corporate officers, managers and directors often possess the authority to make decisions in the organizations. These decisions are governed by the fiduciary duties towards the company shareholders, limited liability company members and the partners (Day, 2009). In the modern competitive and volatile marketplace, there is increased scrutiny of the decisions made by the managers, directors and corporate officers. Like in the case of Jimmy and Johnny, the decisions saw an inflated investment that added no value, which raises the questions of fiduciary duties of the parties involved in the decision-making process.
Read also When there is a Breach of Privacy, has a Breach of Fiduciary Duty Occurred?
The shareholder who sued Jimmy for violation of fiduciary duty of loyalty was correct. In addition, his step to sue the directors of the News Corp. was equally correct. Jimmy and the News Corp. directory are directly responsible for making decisions in the company and are answerable to the breach of the fiduciary duties of loyalty and care.
According to (Miller, 2013), the most important aspect of the fiduciary duty is the element of loyalty. The duty of loyalty demands that the individuals within the company, who are mandated to make decisions, must do so in the interest of the company, other than their own personal interests. From the case, it is quite clear that Jimmy did not act in the interest of the company, but advised the News Corp. directors to buy Johnny’s Television Inc. at exaggerated price.
Johnny is son to Jimmy, who heads the Television Inc., which was sold to News Corp. at an exaggerated price of $500 million instead of its real value of $2 million. Jimmy knew the actual value of the company but worked with his son to use forgeries in exaggerating the value of the company. In addition, Jimmy did not disclose to the board of directors, the fact that Johnny was his son. The whole scenario depicts an element of conflict of interest and lack of loyalty. According to xxxxxxxxx, the fiduciary duties demands that the disclosure of all the transactions made while making decisions. Jimmy failed in this regard is liable for charges against the fiduciary duty of disclosure and loyalty.
Just like in the case of Jimmy, the News Corp. directors are liable for breach of duty of care and loyalty. The fiduciary duty of loyalty demands that the company directors act in the best interest of the company, mostly by avoiding engagement in conflict of interest. The conflict of interest arises when there is “self-dealing” by the company directors. In the case above, the directors of News Corp. violated the duty to loyalty by engaging in “self-dealing”, in that they involved themselves in determining the decision to buy Television Inc. In doing so, the company directors dealt with themselves and this contributed to them not reaching a wise decision.
In practice, as pointed by (Reza, n.d.), “self-dealing” can be avoided by involving the third parties in reaching at decisions on whether to make an investment or not. For example, the News Incl. could have hired a nononterested party to approve the decision to purchase Television Incl from Johnny. Finally, the company directors violated the duty of care in the decisions to purchase Television Incl. The duty of care demands that the company directors make good decisions without the conflict of interest. The company directors were involved in “self-dealing” which created a conflict of interest. Moreover, their decision, which resulted in addition of no value, meant their decision was not held with reasonable care and was irrational. Therefore, the News Incl directors are liable for breach of duty of care.
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