If you are involved in running a business, especially certain types of businesses like corporations, you may have heard the term “fiduciary duty.” This is a core concept that can have major consequences for anyone involved in running a business at a high level. But what exactly is a fiduciary duty in the context of business law, and what happens when someone breaches it?
What is a Fiduciary Duty?
In broad terms, a fiduciary duty is a legal responsibility that a person has to another person or organization, such as an employer or client. In essence, someone who has this type of legal duty must place the interests of the other person or organization over their own, even if it is to their own detriment. It also means they must take appropriate care to make decisions that are in the other person or organization’s interests.
Who Has a Fiduciary Duty?
Broadly speaking, anyone who acts as an agent for a company has a fiduciary duty to act in their best interests, such as a lawyer who represents the company in court. However, in a corporate context, it is important to note that directors and executives have a duty to the company as well as their shareholders. This is important because it means that they can be held legally accountable for violating their duty.
What Responsibilities Are Involved in a Fiduciary Duty?
There are a few core responsibilities involved in a fiduciary duty to a company, and in particular to a corporation. These include, but are not limited to
- Duty of Care: The person must perform their due diligence to ensure they are making informed and reasonable decisions in the interests of the company and shareholders.
- Duty of Loyalty: The person must act in the best interests of the company and shareholders, and disclose any known conflicts of interest.
- Duty of Good Faith: The person must be honest and open in their dealings, and avoid decisions that would result in self-dealing.
What Happens When Someone Breaches Their Fiduciary Duty?
Ideally, when an executive or director has breached their fiduciary duty, it becomes the responsibility of the board of directors to take appropriate action against the offending person. If they fail to do so for any reason, however, it may fall to shareholders to hold them accountable. This may mean filing something known as a shareholder derivative suit, effectively representing the company for the board’s unwillingness to address its own problems.
If you have a business law issue, give the Law Office of Andrew Ross Sack a call. Andrew Ross Sack is a New York and New Jersey business lawyer who has considerable experience in handling the many aspects of business law. To schedule a consultation with New York City/Long Island/Westchester business lawyer Andrew Ross Sack, call (516) 526-3319 or visit his contact page.
