Fraud and Corporate Governance Antifraud laws are a major
weapon in the enforcement of good corporate governance. Much corporate
misgovernance, especially by managers, arises because of misrepresentations
of fact about corporate assets or liabilities. These misrepresentations
usually induce investors to buy corporate stock shares at higher prices and
benefit corporate managers or others inside the corporation who sell their
300 PART 3 Legal Foundations for Business
stock. Sometimes a misrepresentation that raises the stock price obtains a
bonus or other perk for managers or a loan for the corporation. Usually, a
misrepresentation amounts to fraud because investors (who become owners)
or lenders rely on it to their injury, that is, they lose some or all of their
Many specific laws create civil and criminal liability for the fraud of
corporate managers and other corporate agents. As you think about fraud,
remember that it violates the principle of property. One does not acquire
proper ownership by defrauding others of their resources. Fraud does not
respect the equal property right of others.
9. COMMON LAW BUSINESS TORTS
The label business torts embraces different kinds of torts that involve intentional
interference with business relations.
Injurious Falsehood Injurious falsehood, sometimes called trade
disparagement, is a common business tort. It consists of the publication of
untrue statements that disparage the business owner’s product or its quality.
General disparagement of the plaintiff’s business may also provide basis for
liability. As a cause of action, injurious falsehood is similar to defamation of
character. It differs, however, in that it usually applies to a product or business
rather than character or reputation. The requirements of proof are also somewhat
different. Defamatory remarks are presumed false unless the defendant
can prove their truth. But in disparagement cases the plaintiff must establish
the falsity of the defendant’s statements. The plaintiff must also show actual
damages arising from the untrue statements.
As an example of injurious falsehood, consider the potential harm to
Procter & Gamble of the assertions that associated its former logo of moon
and stars with satanism. The company threatened to sue a number of individuals.
In another instance Warnaco sued Calvin Klein, alleging that Klein
had made publicly disparaging remarks about how Warnaco made Calvin
Klein clothing under license. The lawsuit alleged that Klein “falsely accused
[Warnaco] of effectively ‘counterfeiting’ Calvin Klein apparel.”
Intentional Interference with Contractual Relations A second
type of business tort is intentional interference with contractual relations.
Probably the most common example of this tort involves one company raiding
another for employees. If employees are under contract to an employer for a
period of time, another employer cannot induce them to break their contracts.
In a variation on this tort, the brokerage firm PaineWebber Group sued Morgan
Stanley Dean Witter & Company over PaineWebber’s merger agreement
with J. C. Bradford & Company. PaineWebber claimed that Morgan Stanley
pursued “a carefully planned, broadbased campaign to raid Bradford personnel
and interfere with the merger agreement between PaineWebber and Bradford.”
One of the most famous tort cases in history involved interference with
a contract of merger. In that case a jury awarded Pennzoil over $10 billion
against Texaco for persuading Getty Oil to breach an agreement of merger
with Pennzoil. After Texaco filed for bankruptcy, Pennzoil accepted a settlement
of around $3 billion.
Do remember that
you can be sued for
about a competitor’s
product that the
Don’t induce the
employees of another
company to come
to work for you
when they are under
contract to work for a
period of time.