What is a Fiduciary Duty and Do I Owe One?
Being in an argument with your business partner, at some point you've probably heard that dreaded statement, "you've breached your fiduciary duty!" What is a fiduciary duty and whom is the duty owed?
What is a Fiduciary Duty?A fiduciary duty is a legal term describing a relationship between two parties. This relationship requires one party to act in the best interest of the others; to put others best interests ahead of your own. A fiduciary duty brings with it an extremely high standard of care.
Types of DutiesThere are two main duties that are associated with corporations; duty of care and duty of loyalty. Duty of Care requires a person owing a fiduciary duty to avoid acts or foreseeable omissions which can become harmful to the persons the duty is owed. In other words, it requires business directors, officers or members to act in good faith with the best interest of the business ahead of their own personal interests.
Duty of Loyalty requires a company's directors, officers or members to be loyal to the company and avoid any self-dealings. Directors, officers and members are in a position of trust and have a greater deal of knowledge than minority members or a company's shareholders.
An example of this is when a company's director learns there is real estate available for sale and the company would be interested in this deal. He or she learns of this opportunity while searching for real estate for the company, and instead bringing this to the attention of the company and allowing the company to purchase the property, the director purchases it for himself and personally profits from the deal. This would be a breach of his duty of loyalty owed to the company, the company's members and/or shareholders.
When is a Duty Owed?A fiduciary relationship may arise as a matter of law by virtue of the parties' relationship, or it may arise as a result of the special circumstance of the parties' relationship where one places trust in another so that the latter gains superiority and influence over the other. Shervin v. Huntleigh Sec. Corp., 85 S.W.3d 737, 740-41. (Mo. App. E.D. 2002). The question in determining whether a fiduciary or confidential relationship exists is whether or not trust is reposed with respect to property or business affairs of the other. Id. at 741.
Here, the relationship would be between the company and the officer or director which the shareholders or members elected. The officer or director is entrusted to perform his or her duties while under the direction and employment of the company and in turn the shareholders or members of the company.
Whom is the Duty Owed?First, there is a fiduciary duty owed to the company. For instance, the board of directors for a company owe a duty to the company for which they serve on the board. Officers of a company (President, Vice President, CEO, etc.) owe a duty to the company whom employs them.
A fiduciary duty can also be established between majority and minority shareholders or members. Let's take a C-Corporation with 5 shareholders with three members on the board of directors. Say 4 out of the 5 shareholders, combined, own 95% of all outstanding shares. Since shareholders elect the board of directors, obviously, those 4 shareholders can exclusively control the entire company (they have the majority of the stock and they elect the board of directors). In this example, it can be established the fiduciary duty is owed to not only the company, but the majority shareholders could also owe a duty to that minority shareholder.
Breach of Fiduciary DutyTo establish a breach of fiduciary duty, you must first establish the fiduciary relationship exists. Next you'll need to prove the defendant breach that duty that was owed and the breach caused harm or damages to the plaintiff. Zakibe v. Ahrens & McCarron, Inc., 28 S.W.3d 373, 381 (Mo. App. E.D. 2000).
The DefenseThe defendant accused of breaching his or her fiduciary duty has a possible defense of the Business Judgment Rule. This allows a company's officer or director to not be second guessed by the courts when making their business decisions. As long as the directors can show they made the business decisions (1) in good faith, (2) with care as a reasonably prudent person would use, and (3) with a reasonable belief that the directors were acting in the best interest of the company.
The courts are extremely reluctant in overriding business decisions and getting involved in internal company matters. Does this rule sound like a vague rule allowing a company's directors to do whatever they want? Well, that's essentially what it is!
If you've been accused of breaching your fiduciary duty or you suspect your business partner has breached their duty owed to you, contact an attorney as soon as possible to help guide you through tough road of fiduciary duties.