Various parties in a business entity have fiduciary duties. Fiduciary duties refer to obligations imposed upon those with decision-making power. In a corporation, directors, officers and majority shareholders owe fiduciary duties to the corporation and its shareholders. Similarly, in many states, members and/or managers in limited liability companies and partners in partnerships must exercise their duties in accordance with this elevated standard of care when operating their businesses.
Fiduciary duties are set forth by state law, but generally encompass two primary obligations: the duty of care and the duty of loyalty. The duty of care requires relevant persons to inform themselves of information that is reasonably available before making a business decision. The fiduciary must critically evaluate the information to ensure that he is acting in good faith and in the best interests of the corporation.
The duty of loyalty requires the fiduciary to place the corporation before any personal interest or motives. This entails a prohibition against taking advantage of any financial prospect before allowing the corporation to benefit from such opportunity. The fiduciary must avoid conflicts of interest and properly disclose such conflicts if or when they arise.
Fiduciary duties are applicable when a fiduciary engages in any action that affects the business. When evaluating whether directors or officers have carried out their fiduciary duties, the courts focus on the conduct and the manner in which they carried out their decisions rather than the outcome of those findings. Courts utilize the “prudent person” standard to assess the fiduciaries’ actions; this means that the fiduciary must exercise the level of care that a reasonable person would use in the same situation. The business judgment rule protects fiduciaries from decisions that result in unfavorable outcomes so long as the proper care and good faith was exercised in the process.
When fiduciaries do not adhere to these duties, the corporation and the fiduciary may be subject to liability. A breach of fiduciary duty can occur in many different contexts. Some of the most common types of breaches include the misappropriation of a business opportunity, self-dealing, negligence in exercising judgment, misrepresentation of facts or misuse of confidential information.
Contact Shane Coons at 949-333-0900 or visit his website at www.ShaneCoonsLaw.com to find out more about his practice.