29-6 Business Case Problem with Sample AnswerDuty of Loyalty.

Kids International Corp. produced children's wear for Walmart and other retailers. Gila Dweck was a Kids director and its chief executive officer. Because she felt that she was not paid enough for the company's success, she started another firm, Success Apparel, to compete with Kids. Success operated out of Kids' premises, used its employees, borrowed on its credit, took advantage of its business opportunities, and capitalized on its customer relationships. As an "administrative fee," Dweck paid Kids 1 percent of Success's total sales. Did Dweck breach any fiduciary duties? Explain. [Dweck v. Nasser, 2012 WL 3194069 (Del.Ch. 2012)] (See Directors and Officers.)

Below is a sample answer:

Sample AnswerDuty of Loyalty. Dweck breached the fiduciary duty of loyalty that a director and officer owes to his or her corporationin this case, Kids. The essence of the duty of loyalty is the subordination of self-interest to the interest of the entity to which the duty is owed. The duty presumes constant loyalty to the corporation on the part of the directors and officers. The duty prohibits directors from using corporate funds or confidential corporate information for their personal advantage. Here, Dweck breached her duty of loyalty to Kids by establishing a competing company that usurped Kids' business opportunities and converted Kids' resourcesemployees, office space, credit, and customer relationshipsto conduct the competing firm's operations. The "administrative fee" was most likely insufficient compensation. Dweck would be liable to Kids for the damages caused by this breach of duty. In the actual case on which this problem is based, the court held that Dweck breached her duty of loyalty to Kids and awarded as damages the lost profits that Kids would have generated from the business diverted to Success.