Fiduciary duties

Fiduciary duties are common in business corporations, partnerships, or limited liability companies (LLCs). In each case, those in control of the business owe fiduciary duties to the business. This page discusses corporations.

A fiduciary relationship exists between two persons when one of them is under a duty to act for, or to give advice for, the benefit of the other upon matters within the scope of the relation. The duties that arise under such a relationship include the following: duty of care, duty of loyalty, duty to account, duty of confidentiality, duty of full disclosure, duty to act fairly, and duty of good faith and fidelity.

Corporate Fiduciary Duties

I am instructing you that the law says corporate officers, directors, and controlling shareholders owe a fiduciary duty to the corporation and non-controlling shareholders. As officers and directors of [corporation], the defendants owed that corporations and its shareholders fiduciary duties. This means that they are required to discharge the duties of their respective positions in good faith and with that degree of diligence, care, loyalty, and skill that ordinarily prudent persons would exercise under similar circumstances in like positions.

Majority shareholder have a fiduciary duty to minority shareholders. If the majority shareholders undertake, either directly, or indirectly through the directors, to conduct, manage, or direct the corporation’s affairs, they have a duty to do so in good faith, and consistent with the best interests of the corporation.

Loyalty. The duty of loyalty means essentially that fiduciaries such as the defendants may not put their own personal interests ahead of those of the business—neither in their dealings with the business nor in their dealings with others. 

Due care. A fiduciary owes a duty to perform functions in good faith, in a manner they reasonably believed to be in the best interest of the business, and with the care that ordinarily prudent persons would reasonably be expected to exercise. 

Relevant circumstances include:

1. Whether the problem that allegedly developed was reasonably foreseeable at the time;
2. Whether the magnitude of the problem that developed was reasonably foreseeable;
3. The state of the corporation’s business;
4. The state of the economy or areas of the economy;
5. The policies of regulatory authorities;
6. The complexity and scale of the corporation;
7. The policies of the board of directors and committees of the board;
8. The reliability of, and confidence to be placed in, other directors, officers, employees, experts, and other persons and committees of the board; 
9. The precise role the officer or director played within the corporation.

The elements that must be proved to win a breach of fiduciary duty case are:

1. That the defendant owed the plaintiff a fiduciary duty;
2. That the defendant breached the fiduciary duty owed to the plaintiff; and
3. That the defendant’s breach of fiduciary duty was the proximate cause of some injury or damage to the plaintiff.

Causation. The breach of fiduciary duty must have caused the losses claimed.  This may involve a comparison of the fiduciary’s actions with those to whom he or she owed fiduciary duties. It  also requires analysis of other factors that may have caused the loss.  Not every breach will cause a loss, and not every breach will cause the extent of the losses claimed. Expert testimony may be required on the point, especially when lost profits are claimed, but in other cases it might be cheaper to make a claim that the wrongdoer should disgorge the money wrongfully obtained, requiring very little work from an expert or perhaps none at all.

Damages. Damages caused by the breach of fiduciary duties might consist of lost profits, expenses incurred, restitution of wrongful benefits obtained, and money spent to mitigate the loss. This can become complicated depending on the wrongdoing.  Was the whole business lost, requiring damages for the whole business? Was one customer contract lost, and would it have been renewed such that a lifetime of losses should be reimbursed? What is the value of stolen formulas, customer lists, business plans?  Is a permanent injunction needed to prevent the wrongdoer from exploiting advantages obtained by breaching his or her fiduciary duties?

If you have questions about these matters, please get in touch with Tom Patterson at tpatterson@pattersonlawfirm.com

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