A couple of years ago, comedian Kevin Hart teamed up with a Virginia mobile-game developer called Stand Up Digital, Inc., to develop and release a video game called “Gold Ambush” that would feature Hart and his family members as playable characters. Hart licensed his likeness to Stand Up and was granted a 20% stake in the company as well as a seat on the board of directors in exchange. The game was launched in September 2017 but did not perform as well as the developer had hoped and is no longer available for download. Stand Up attributes the poor performance of the game to Hart’s decision to issue an emotional apology on Instagram–just days prior to the game’s launch–following rumors of infidelity. In the recording , Hart apologized to his wife and kids for having done “something wrong” and said that he would not permit “another person to have financial gain off his mistakes.” The video has been viewed several million times.
Stand Up sued Hart for breach of fiduciary duty (amid other claims), arguing that Hart’s failure to warn it of his plans to “go public” about the alleged affair before posting his Instagram apology damaged the success of Gold Ambush. The court allowed the case to proceed through the discovery phase but ultimately entered summary judgment in Hart’s favor on the fiduciary-duty claim, finding that there was no evidence he breached such a duty.
The elements of a cause of action for breach of fiduciary duty are: (1) the existence of a duty; (2) a breach of the duty; and (3) damages proximately caused by that breach. In Virginia, corporate officers and directors have a fiduciary duty in their dealings with shareholders, as well as with the corporation itself, and must exercise good faith in such dealings. (See Glass v. Glass, 228 Va. 39, 47 (1984); Rowland v. Kable, 174 Va. 343, 366 (1940)). This fiduciary duty prohibits directors from putting themselves in a position where a conflict of interest may exist between the director’s personal interests and the corporation’s interests.
Under Va. Code § 13.1-690(A), “A director shall discharge his duties as a director, including his duties as a member of a committee, in accordance with his good faith business judgment of the best interests of the corporation.” Section 13.1-690 essentially provides a “safe harbor” that shields a director from liability for acts performed as a director, or for failing to take action, provided the director acted (or refrained from acting) in the exercise of good-faith business judgment. A director’s discharge of duties “is not measured by what a reasonable person would do in similar circumstances or by the rationality of the ultimate decision. Instead, a director must act in accordance with his/her good faith business judgment of what is in the best interests of the corporation. (See Willard ex rel. Moneta Bldg. Supply, Inc. v. Moneta Bldg. Supply, Inc., 258 Va. 140, 151 (1999)).
Hart argued that he had no duty to inform or warn Stand Up about his Instagram post because it was a private decision having nothing to do with “taking advantage” of his position as a director of Stand Up. Stand Up countered by citing cases holding that a director has a duty to “tell his principal about anything which might affect the principal’s decision whether or how to act.” (See Allen Realty Corp. v. Holbert, 318 S.E.2d 592, 595
Photo by Adam Bielawski [CC BY-SA 3.0]
The court agreed with Hart. It distinguished the cases cited by Stand Up in that those cases involved decisions made by a director or fiduciary that involved the corporation’s business interests on the one hand, and the director’s personal interests on the other. This case, by contrast, involved a director’s personal, private decision that only indirectly clashed with Stand Up’s business interests. Hart did not stand to gain personally or financially by taking action that harmed Stand Up. To the contrary, he suffered considerable reputational damage when allegations of extramarital activity surfaced.
Moreover, the court added, Virginia’s business judgment rule provided protection for Hart’s decision. “Virginia’s business judgment rule,” the court wrote, “presumes that directors have acted properly and in good faith in the exercise of their business judgment” and “are called to account for their actions only when they are shown to have engaged in self-dealing, fraud, or have acted in bad faith.” Noting that whether a director violated a fiduciary duty is a subjective inquiry, the court opined that Hart did not engage in self-dealing and there was no evidence that he acted fraudulently or in bad faith. In light of those findings, he was entitled to the protection afforded by the business judgment rule and the court entered summary judgment in his favor.