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Understanding breach of fiduciary duty in business law

Understanding breach of fiduciary duty in business law

On Behalf of | Oct 26, 2021 | Business Litigation |

Fiduciaries are common in the business context. Corporate officers, directors, business partners, managing members and other key decision-makers are often considered fiduciaries. As such, they are held to high standards when carrying out their responsibilities. Failure to uphold those standards can result in costly litigation.

What is a fiduciary?

The term fiduciary simply refers to someone who has a legal duty to act in the best interests of someone else. Depending on the structure of the business, that “someone else” might be the shareholders, members or other business partners.

What are fiduciary duties?

While the specifics vary by state and business structure, in general, fiduciaries are bound by three core duties:

  • Duty of loyalty: Fiduciaries must act in the best interests of the organization rather than their own.
  • Duty of care: Fiduciaries must carry out their responsibilities in a competent manner, exercising due diligence and acting in good faith.
  • Duty of obedience: Fiduciaries must not exceed the scope of their role, and they must uphold the governing framework (such as the articles of incorporation, bylaws and official resolutions) of their organization.

Some states also impose a separate duty of good faith, which means conducting business in a manner that’s honest and well-intentioned.

Breaches of fiduciary duty: examples

Business litigation frequently includes allegations that an officer or director breached their fiduciary duty. Those allegations might involve:

  • Conflicts of interest, including failure to disclose conflicts, and self-dealing – for example, making insider transactions that benefit the decision-maker’s own interests
  • Failure to exercise due diligence before entering transactions or making decisions, including failure to seek advice from trusted experts when warranted
  • Mismanagement or commingling of company funds or assets
  • Failure to disclose material facts to shareholders or members

Depending on the direction the litigation takes, resolving these disputes can be a resource-intensive endeavor. A proactive legal strategy is critical for addressing the dispute in an efficient, cost-effective manner.