Breach of Fiduciary Duty
What are Fiduciary Duties?
Fiduciary duties are the legal obligations of a person or entity to act in the best interest of another person or entity. The fiduciary must put the interests of the other party above their own and avoid any conflicts of interest. A fiduciary relationship is based on trust, and the fiduciary is expected to act with honesty, integrity, and loyalty.
Who has Fiduciary Duties?
Fiduciary duties can apply to many different relationships, such as those between a trustee and a beneficiary, a lawyer and a client, a financial advisor and a client, and a director or officer and a corporation. In the context of a corporation, directors and officers have fiduciary duties to act in the best interest of the corporation and its shareholders.
What Creates a Breach of Fiduciary Duty?
- Act honestly and in good faith with a view to the best interests of the corporation and
- Exercise the care diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
Considering that directors and officers typically have greater insight into a company’s financial and other highly sensitive information, they carry a greater responsibility to ensure that the information is not used in any way that is unfavorable. Or is not in the best interest of the organization.
The Best Interest of a Corporation
Available Defences for Breaches of Fiduciary Duties
Directors and officers who are facing a claim of breach of fiduciary duty typically have two defences available to them. First, they can argue that they exercised the care, diligence, and skill that a reasonably prudent person would have exercised in comparable circumstances. Second, they can argue that they relied in good faith on financial statements or reports provided to them by the corporation or a professional person.
Remedies for Breaches of Fiduciary Duties
- The payment of money
- By directing the majority to buy the aggrieved person’s shares for a reasonable price (as determined by professional valuation)
- By reinstating the aggrieved person to his or her former position in the business
- Holding an auction at which all of the shareholders have the right to purchase shares of the corporation.
How to Prevent Breaches of Fiduciary Duties
The best way to prevent breaches of fiduciary duties is to establish appropriate policies, checks and balances, and internal processes within an organization. These practices can ensure that fiduciary employees are operating according to their duties and obligations and that conflicts of interest are identified and managed.
In conclusion, fiduciary duties are crucial for the successful operation of any organization. Directors and officers have a legal obligation to act in the best interest of the corporation, and breaches of fiduciary duties can result in serious consequences for both the individuals involved and the company itself.
It is essential for corporations to establish appropriate policies, checks and balances, and internal processes to ensure that fiduciary employees are operating according to their duties and obligations. Seeking the advice of a corporate lawyer can be beneficial in establishing these systems and processes and in resolving disputes that may arise amongst shareholders.
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