Generally, when you are an officer or director of a corporation, or a manager of a limited liability company (LLC), you have what are called fiduciary duties to that corporation or LLC. In some instances, majority shareholders of corporation also have fiduciary duties to the minority shareholders (more on that in future article). The duties are the:
(1) duty of good faith/due care: to act with the care an ordinarily prudent person in a like position would exercise under similar circumstances - to act in a manner he or she reasonably believes to be in the best interests of the company; and the
(2) duty of loyalty: to act solely for the benefit of the company to whom the duty is owed with respect to all matters within the scope of the fiduciary relationship.
These duties are to the company alone, whether an LLC or a corporation, and not to other officers, directors, shareholders or members of the company.
Mismanagement or Negligence
Fiduciary duties can be breached in a variety of ways. The duty of good faith and due care is most often breached when an officer, director, or manager of the company does not perform his or her duties with the requisite amount of reasonable care for the position, i.e., failing to perform their duties, or performing their duties in an unacceptable manner. These failures are actionable if they were not performed in good faith, were beneath the standard of care of an ordinarily prudent person in a like position, or were not in a manner reasonably believed to be in the best interests of the company.
Issues with Money
Breaches of the duty of loyalty often involve money or business opportunities. Self-dealing is a common breach of fiduciary duties where a director, officer, or manager prefers themselves over the company in some way. This occurs when an officer pays himself back for a loan before paying back normal business expenses, or when an officer takes a business opportunity for himself which could have benefited the company (so-called “usurping corporate opportunities”), for example. There are other nefarious acts that are more obviously a breach of their fiduciary duties – i.e., stealing corporate assets or reimbursing themselves for personal expenses.
The actions (or omissions) of a director or officer can lead to substantial injury to the company and need to be addressed as soon as reasonably possible. Contacting a competent business litigation attorney should be the first step taken towards addressing these issues.
*This blog is for educational purposes only and is not intended to provide, nor should it be used for, legal advice. Nothing herein should be construed as providing legal advice. By using this blog, you the reader acknowledge that no attorney-client relationship is being or has been created with the Author or his law firm. Non-attorneys should not use this blog for legal advice and attorneys should not use this blog as a substitute for their own legal research.