The Who, What, When, Where, and Why of Fiduciary Duties in Small Businesses and Corporations.
A Brief Introduction to a Broad, Complex, and Ever-Changing Duty.
What is a fiduciary duty?
A fiduciary duty is often regarded as the highest duty recognized by the law. In simplistic terms, a person charged with exercising fiduciary duties (commonly referred to as a fiduciary) must discharge their duties with the utmost good faith, care, and the finest loyalty.
More specifically, the term “fiduciary duty” is an umbrella term for a number of duties that makeup the fiduciary duty. For example, the term “fiduciary duty” encompasses many duties, including, (1) the duty of care – to act with diligence and with the care an ordinarily prudent person in a like position would exercise; (2) the duty of informed judgment – the process of gaining sufficient familiarity with the background facts and circumstances to make an informed judgment before acting; (3) the duty of disclosure – to disclose material / important information to shareholders / members; including, conflicts of interest; (4) the duty of confidentiality – to protect all confidential and non-public information; and (5) the duty of loyalty – to act in the best interests of the corporation, company, partnership, etc…;
Who is charged with exercising fiduciary duties?
Generally speaking, persons who exercise control over a corporation or similar entity are held to this higher, fiduciary duty standard. And therefore, not surprisingly, directors and officers of corporations, who by their very nature exercise control over a corporation, are held to this higher, fiduciary duty standard. Importantly, however, directors and officers are not the only persons held to this higher standard. In fact, in addition to directors and officers, majority shareholders are also held to this higher, fiduciary duty standard. And, depending upon local laws, even minority shareholders can be held to this higher standard. Consequently, even if you do not serve as a director or officer of a corporation, be alert, because if you hold an interest in the business, you may nonetheless be held to this higher, fiduciary duty standard.
Business owners in different business entities are also held to this higher, fiduciary duty standard. For example, partners in both general and limited partnerships are required to discharge their duties in a fiduciary manner. And, depending upon applicable laws in different states, members and/or managers in limited liability companies (LLCs) may also be required to discharge their duties in a fiduciary manner
When do fiduciary duties apply?
Principally, fiduciary duties apply when a fiduciary takes action relating to or that could otherwise effect the business entity; including, potential business opportunities not yet realized.
Fiduciary duties are generally not extinguished until the fiduciary is relieved / removed from the position that created the fiduciary duties to begin with. It is important to note, however, that in many jurisdictions fiduciary duties can extend beyond the point in time in which a person is relieved from their position within the business entity.
Where do fiduciary duties come from?
Fiduciary duties were developed through the common law – a body of law originally developed in England and later shaped by our courts. Today, fiduciary duties arise from both the common law and state statutes. For example, state statues frequently impose statutory standards of conduct upon officers and directors, which generally require them to act in good faith and in the best interest of the corporation. These statutes often form the basis of a claim or defense for breach of fiduciary duty.
Why do you need to be aware of these fiduciary duties?
Whether you know it or not, if you are a part of a business entity (as a director, officer, member, manager, partner, or majority shareholder) you will likely be held to this higher standard when taking action with or relating to the business entity. Failure to comply with fiduciary duties can result in liability to both the business entity and you. In fact, failing to fulfill fiduciary duties can be considered oppressive conduct, which can result in the dissolution (termination) of the business entity.
Finally, it is important to note that this article simply an introduction and that fiduciary duties can and do differ from state to state and entity to entity. If you have further questions or comments regarding fiduciary duties, please feel free to contact me, Matthew McKinney, at email@example.com, or leave a question or comment in the comments section below.
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