Fiduciary Duties and Businesses

Fiduciary Duties

One’s Fiduciary Duty is to look out for someone’s best interest.

Fundamentally, a fiduciary duty is the legal requirement of an individual to act in the best interest of another.  In this arrangement, all parties that owe this duty are called fiduciaries and those that are owed the duty are referred to as principals.  For example, lawyers have a fiduciary duty to their clients; guardians have the same duty to their wards.  Specifically, in terms of business law, an article from McFarlin Law, LLP notes that directors and officers of a corporation owe a fiduciary duty to the company and to their shareholders.  Disputes, therefore, often arise as a direct result of allegations that an officer or director breached his or her fiduciary duty.  However, these accusations shouldn’t be made or taken lightly; such declarations can have long-lasting financial and professional consequences for the officer or director.

To help officers and directors of corporations avoid such accusations, the article provides several means through which fiduciary duty can be breached. These examples have several themes, starting with a focus on competition; fiduciary duty is breached when an officer choose to start a competing business or help a business competitor.  Funds also account for a large portion of the possible ways to break fiduciary duty.  Many methods are discussed, including mixing business and personal funds, spending corporate funds on things that do not benefit the corporation, and fraud, incompetence or misappropriation of funds.  Finally, a general code of ethics must play a role, as ethical violations or negligent errors also can serve as a breach of fiduciary duty.

In the case that accusations are made, a review will be conducted by the court, which will look at the actions of the officer in question.  The court will have to determine if an ordinarily prudent person would have acted the same way under similar circumstances.  For instance, did the officer act on good faith?  Would someone else have made the same decisions in the same situation?