Fiduciary Duties of Directors: Everything You Need to Know
The fiduciary duties of directors include acting in good faith on behalf of the company.3 min read
The fiduciary duties of directors include acting in good faith on behalf of the company. A fiduciary duty exists when one party, known as the beneficiary, must have confidence in the other party to perform deeds on their behalf. A fiduciary is responsible for acting in good faith when making decisions for their beneficiary.
Examples of fiduciary relationships include:
- Lawyers to clients
- Homeowner associations to members
- Priests to parishioners
- Physicians to patients.
- Company directors to the company and its stockholders
Who Is Responsible for Fiduciary Duties?
Typically, corporate directors, controlling stockholders, board members, and the like may have fiduciary duties to a corporation and stockholders. The same standard may not apply to officers of charities, as they may be allowed to advance themselves financially as long as they do not expense the charity.
Directors and officers are responsible for putting the best interests of their company first. They may not use funds for person gain or to advance another company. They must not only look at new information when making a business decision but also assess how using it would impact the company. Directors or officers may want to obtain the recommendation of an expert from outside the company to assist with this.
In order to make the best decisions for a company, a director must do the following:
- Exercise good judgment.
- Be honest and fair when making decisions.
- Keep up to date on information by regularly attending board meetings.
- Keep clear records of meetings where important decisions were reached.
- Supervise staff.
They should be candid with other officers and shareholders so that the best decision for the company can be reached. For example, they should share conflicts of interest between themselves and the company. Fiduciary responsibilities also apply to directors of nonprofits, who must act in compliance with the charity's expressed purposes only.
Why Are Fiduciary Duties Important?
Fiduciary duties are important because they decrease the likelihood that a beneficiary will be abused by a fiduciary. They create balance in a relationship where one person has more power and expertise than the other.
What Are Common Examples of Disloyalty?
Common examples are conflicts of interests, helping the competition, and covertly profiting from dealings. Failing to disclose conflicts of interest or divulging confidential corporate information to those outside the company constitute failure to act in good faith. In some states, it is permissible for a director to profit personally from dealings if the company has waived its interests.
What Is the Result of a Violation of Fiduciary Duty?
If an officer breaches his or her fiduciary loyalty, he or she may be sued and compelled to give resulting profits to the company.
What Are Business Judgment Rules?
Business judgment rules exist to ensure a high standard of the review of a director's conducts. A business judgment rule is basically the equivalent of the “benefit of the doubt.”
When applying the business judgment rule, the plaintiff submits sufficient evidence to show that the fiduciary did not act in good faith. This places the burden of proof on the defense, who will try to show that the fiduciary did uphold their duties. This does not mean that the court is automatically biased against the director with fiduciary responsibilities, as courts understand that in midst of financial difficulties, directors often need flexibility and discretion when negotiating and making decisions.
What Are the Fiduciary Duties at the Point of Insolvency?
If a company reaches insolvency, directors may use the benefit of the business judgment rule to make decisions that they believe will return the company to solvency. However, they must still use good judgment when deciding whether or not to incur debt or stay open, to give just a few examples.
Historically, creditors of companies have been extended the fiduciary duties formally restricted to directors. However, more recently this has not been the case, In a 2007 case, North American Catholic Educ. Programming Found., Inc v. Gheewalla, 930 A.2d 92 (Del. 2007), the Supreme Court maintained that a fiduciary has continuing responsibilities to the company, but denied that creditors owed duties. It held that once a company is officially insolvent, the creditors replace the shareholders as the primary constituency and are instead owed fiduciary duties.
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