A Big One: Breach of Fiduciary Duty
Probably half of our practice of law relates to breaches of fiduciary duty. So let's look into this. Plato might have described it as akin to when a shepherd fails to tend to his flock, or when a parent fails to look after his child. In essence, a person in a position of special trust and responsibility acts selfishly, harming the person they are supposed to be helping. The word "fiduciary" comes from the latin word for "trust", and in our society, many types of professionals have come to be considered fiduciaries, or persons invested with special trust and a heavy obligation of fidelity and care in favor of others. Lawyers and trustees are prime examples of fiduciaries. They have a special, heightened duty of care they owe their clients or beneficiaries, and these duties are referred to as fiduciary duties.
We, as business lawyers, deal with this often since directors of corporations, and managers of LLC's, are fiduciaries. The owners, stockholders, and LLC members are the beneficiaries. The directors owe them a special duty of care. Failure to exercise that duty is at the heart of half of all our cases and assignments.
In the case of a corporate or LLC fiduciary, their duty of care, that is to say, their fiduciary duty is divided into two parts. First, the duty of loyalty. Second is the duty of care. Consider each of these. The duty of loyalty is straightforward. The director should not engage in self-dealing or pursue matters which contain conflicts of interest. The test for breaching this duty is also clear: intrinsic fairness. If the director's acts are intrinsically fair to the shareholders, no duty has been breached, even if the director benefited personally. For instance, if the director places an order on the corporation's behalf with a company he also owns, thus earning a secret profit on the order, such may be a breach of fiduciary duty. But if he can show that the price was as good or less than the corporation could have gotten elsewhere, then he may be able to show that the action was intrinsically fair to the shareholders. They did not lose or suffer anything in the matter.
Duty of Care is the other of the director's fiduciary duties. He cannot neglect the corporation or take actions which have no legitimate business rationale, such as breaking laws, failing to file tax returns, or refusing to attend meetings and account to the shareholders. The test for the breach of the duty of care is also well known, namely the business judgment rule. Directors can pursue actions so long as there is a legitimate business reason, even if the action winds up being detrimental or harmful to the shareholders, so long as there was some real potential business benefit for taking the act. Obviously, there is never a real potential benefit from breaking the law, or from breaching the duty of loyalty in a manner intrinsically unfair...which means that breaches of the duty of loyalty may also be breaches of the duty of care.
If you are facing a breach of fiduciary duty issue, call us today.