A fiduciary is an individual who has either an ethical or legal relationship of trust to another individual or entity. When an individual has a fiduciary duty to another, the fiduciary must conduct themselves according to the benefit of the other party.
The individual to whom a duty is owed is often referred to as the principal or the beneficiary. Generally, a fiduciary takes care of money or other types of assets for a beneficiary.
What Are Corporate Fiduciary Duties?
The officers and directors of corporations owe fiduciary duties to corporate stockholders as well as to the corporate business entity itself. Because of this, corporate officers and directors are said to be fiduciaries.
Fiduciary duties in a corporate setting require directors to:
- Apply their best business judgment;
- Act in good faith; and
- Promote the best interests of the corporation.
Protection from Fiduciary Duties Violations: What Is the Business Judgment Rule?
Although officers and directors of a corporation must take care not to violate their fiduciary duties, they can take reasonable risks, direct business and corporate affairs, and make innocent mistakes without penalty. The business judgment rule is a rebuttable presumption that officers and directors of a business entity:
- Made decisions on an informed basis as well as in good faith; and
- Honestly believe their actions are in the corporation’s and shareholders’ best interests.
In other words, unless another party can successfully rebit the business judgment rule presumption, that presumption will protect officers and directors from personal liability to the corporation and its shareholders. This presumption, however, may be successfully rebutted by showing that at least one of the fiduciary duties was breached.
Classifying Fiduciary Duties: What Are the Three Basic Types of Fiduciary Duties?
One of the most important fiduciary duties is an obligation to act for the benefit of the beneficiary, not the fiduciary. There are three categories of fiduciary duties of corporate officers, including:
- The duty of care;
- The duty of good faith; and
- The duty of loyalty.
Many corporations are incorporated in the State of Delaware, due to its corporation friendly laws. Therefore, examples will be provided from that state.
The duty of care requires that officers and directors must use care and be diligent when they are making decisions on behalf of the corporation and its shareholders, the true owners of the corporation. The officers and directors meet their duty of care if they act:
- In good faith;
- With the care of a reasonable person in like position; and
- With reasonable belief their decisions are in the best interests of the corporation.
The standards are similar to the ones provided under the business judgment rule. It is important to note, however, that some Delaware case law provides that even a careless or negligent director or officer may be protected.
This is because, in order to violate a duty of care, a director or officer may have to be grossly negligent, rather than simply being negligent or careless. The second category of duty is the duty of loyalty.
Officers and directors must have an undivided duty of loyalty to the corporation and shareholders. This means they have to put the interests of the shareholders and the corporation above their own interests.
This duty of loyalty can be violated in numerous ways, including, but not limited to:
- Gaining secret profit belonging to the corporation;
- Competing with the corporation;
- Seizing corporate opportunity; and
- Self-dealing with the corporation.
The key to these issues is disclosure as well as obtaining the appropriate approval from other disinterested shareholders and directors, or those who do not have a stake in the transaction. A director should disclose any suspicious transactions and ask others, such as directors and shareholders, for permission to conduct it.
Under Delaware law, the duty of good faith is not clearly defined as its own fiduciary duty or as a part of the duty of loyalty. The duty of good faith can be understood as not engaging in a conscious disregard or an intentional dereliction of duty.
This duty provides another basis for holding a director or other party liable for improper actions.
What if Fiduciary Duties are Violated?
As previously noted, in order to violate a duty of care, a director or officer must have been grossly negligent. In order for a plaintiff to show that there was a breach of fiduciary duty, they will be required to prove:
- A fiduciary relationship existed between the plaintiff and the defendant at the time of the dispute;
- The scope of the relationship and the duties of the fiduciary;
- That the defendant breached the duties that were outlined within the scope of the fiduciary relationship and caused harm to the plaintiff; and
- That there is a remedy available for the harm that occurred due to the breach.
If a plaintiff can show these elements, they may be able to initiate a lawsuit against the fiduciary. It is important to note, however, that some fiduciary relationships are bound by agreements that may include arbitration clauses.
An arbitration clause would prevent the individual from being able to outright sue the business for a breach of duty. The most basic meaning of a breach of a fiduciary duty in a business relationship includes:
- Any actions taken that are contrary to the interests of the client or the business;
- The failure to disclose pertinent information; or
- Actions taken for the self-interest of the fiduciary.
Common examples of breaches of fiduciary duty in business relationships include:
- Acting in a way that is contrary to the best interests of the client or is against the best interests of the corporation;
- Self-dealing, or otherwise acting in the fiduciary’s self-interest, rather than the best interests of the client or business;
- Misappropriating funds, also known as embezzlement;
- Misrepresenting important facts, for example, lying to a company’s shareholders about the company’s financial data; or
- Otherwise neglecting the fiduciary’s duties or responsibilities to the corporation.
Each individual state will outline what remedies may be available in cases of breach of fiduciary duty. The remedies that are available may also depend on the severity of the breach.
Some of the most common remedies include paying fines, including reimbursing lost profits and out-of-pocket losses. If the defendant was found to have engaged in gross negligence, they may be required to pay extra damages in addition to those awarded in negligence cases.
Do I Need to Consult an Attorney?
The laws that govern corporations are vast and complex. In addition, the laws governing the duties of fiduciaries are nuanced and may vary by state.
If you are a director, officer, or concerned shareholder of a corporation, and you have any questions or issues related to corporate fiduciary duties, it is important to consult with a commercial lawyer. Your lawyer can help your corporation develop a strategy of compliance with fiduciary duties.
Your attorney can also help your corporation set up a risk and compliance oversight system that can help ensure that directors’ and officers’ actions are covered by the business judgment rule.