Everyone involved in a business entity, including shareholders, directors, officers, and managers, are all players in a complex game with legal and financial implications. Knowing the rules and the roles of the players is essential for the proper functioning of the business. A cornerstone of those rules is fiduciary duty. Those holding these positions need to understand what is expected of them and the implications of failure to meet that duty. Here we discuss the top 5 things to consider with regards to fiduciary duty, particularly in the context of Chicago, where local regulation may dictate additional considerations.

Fiduciary Duty Defined

Fiduciary duty is quite simple at its core: those in positions of trust need to act with loyalty and integrity on behalf of their businesses and those who own them. More colloquially known as the duty of a fiduciary, this legal obligation is much more than just a nice thought. Those in positions of trust are expected to make decisions with the interests of the business (or of the shareholders, if different) in mind and must not act to their own benefit. This is part of the reason why fiduciary duty is built into most business structures; it ensures trust and removes potential for financial and legal exploitation.

What Do You Need to Know?

In order to uphold your fiduciary duty as a director, officer, or manager, there are 5 main things that must be taken into consideration.

1. Duty of Care

The duty of care requires those in fiduciary roles to act with a reasonably expected degree of care. They must use the skill, knowledge, and diligence that any reasonable person in a similar position would have. This basically means that you should evaluate any decisions for potential risk and only proceed with them if they benefit the business or the shareholders. To make sure you are meeting your duty of care you should reasonably evaluate any potential risk associated with any action taken, considering any reasonable alternatives.

2. Duty of Loyalty

The duty of loyalty means that you must act in such a way that promotes the interests of the enterprise over any other interests. This includes refraining from conflict of interest or self-interest transactions and disclosing any potential conflicts of interest to the appropriate parties. In essence, the duty of loyalty requires that decisions are made with the interests of the business in mind over any personal (or potentially conflicting) interests.

3. Duty to Follow Authority

As a fiduciary, you are legally obligated to obey the authority of the company or its shareholders. This means that you must follow any instructions they provide, as long as they are within the scope of the law and the business’s internal regulations. You should also pay attention to any applicable laws, regulations, and acts that may have bearing on your duties and decision-making.

4. Duty to Act in Good Faith

As a fiduciary, you are obligated to act in good faith in all decisions you make. This means taking the interests of the company or its shareholders into account above your own. Additionally, it requires that all decisions are made with an expectation that they will not adversely affect the business or its shareholders’ best interests. It is also important to be honest in your decision-making and not try to take any shortcuts.

5. Obligation to Obtain Confidentially

It is important to respect the confidentiality of any information you learn while performing your fiduciary duties. Not only is it a moral and ethical obligation, it is also illegal to disclose confidential information of a company to external sources. This means not discussing company business outside of work or with other staff members who do not need to know.

Considerations for Chicago

When meeting or exceeding your fiduciary duty in Chicago, there are a few additional considerations to keep in mind.

First, be aware of the Illinois Uniform Securities Act. This piece of legislation establishes certain registration requirements for certain kinds of investments, such as venture capital investments, and affects investors and those receiving investments alike. It is important to understand the implications of this law and the role it plays in safeguarding investments.

The second consideration is the fact that Illinois is a proportional representation state. This means that in the event of a shareholder class action, the defendant is not found liable, all the shareholders collectively split any compensation. Determining the percentage of responsibility in such cases is important to take into consideration as part of meeting any fiduciary duty.

Finally, it is necessary to consider the financial goals of the shareholders. Being mindful of what the shareholders are hoping to gain from their activities and investments is a key component of obeying one’s fiduciary duty. Knowing the interests of the shareholders and striving to meet their objectives can help to better achieve essential fiduciary duties.

In summary

Fiduciary duty is an integral part of any successful business, and it is important for those in positions of trust to understand the responsibilities and obligations that come with the role. This article delves into the top 5 things to consider regarding fiduciary duty and the additional considerations when dealing with the specific regulations of Chicago. Taking into consideration each of these pieces of advice is integral to keeping any business successful.

Topics:

Fiduciary Duty,

Duty of Care,

Duty of Loyalty