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The Ins & Outs Of Fiduciary Duty

The term fiduciary duty is often mentioned in corporate documents, compliance discussions, newspaper headlines, and lawsuits. After all, it is an important concept that serves as a basis for corporate officers, board members, majority shareholders, or directors of a corporation on how to conduct themselves concerning corporate matters. Given the importance of the concept of fiduciary duty in corporate and securities matters, every shareholder must be aware of this theory to ensure that their rights are well protected from any violations.

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What Is Fiduciary Duty?

Fiduciary duty is the legal and ethical standard imposed on how an officer, board member, and director of a corporation is expected and obligated to act towards their corporate duties.

Compliance with fiduciary duty serves as the cornerstone of a director’s or officer’s duties. Since directors and officers are given broad authority, the three primary fiduciary duties discussed below provide the limits and guidelines on how each officer and director must approach their actions and decisions involving or affecting the corporation and the shareholders.

Given the importance of these fiduciary duties in the practical, legal, compliance, and balance operation of a corporation, any violation of fiduciary duty is considered a serious offense and is actionable.

The theory of fiduciary duty covers the following three major concepts:

Duty of Loyalty

Duty of loyalty refers to an officer’s obligation to always put the corporation’s best interest before their personal interests and business gains. Since officers and directors of a corporation have the power to make all decisions in their capacities as fiduciaries, they are obligated to act without personal economic conflict with the corporation it serves.

Under this fiduciary duty, an officer or director is expected to act solely for the corporation’s best interest and its shareholders. This means that the officers and directors should avoid any conflicts of interest, efforts to compete with the corporation’s interest, or even earn undisclosed profits from any corporate business dealings.

Duty of Care

Under the fiduciary duty of care, officers and directors of a corporation are required to use appropriate care, diligence, and uncorrupted business judgment when they are making decisions that pursue the corporation’s interests. Simply put, the directors and officers are expected to exercise reasonable diligence and prudence solely for the corporation’s advantage.

This fiduciary duty is considered a breach of the officer or director committing an overt act that shows mismanagement or inaction and failure to exercise proper care. An officer or director who violates their duty of care may be held liable to the corporation, shareholders, creditors, or other entities who had incurred losses by failing to act within their expected duty of care.

In order to avoid violation of this fiduciary duty, an officer or director could ensure compliance by fully disclosing any potential conflicts with the corporation. By seeking active compliance, the officer or director could allow the board to investigate, assess, evaluate, and review the potential conflicts and allow the parties to resolve any issues or provide their finding if no conflicts have been determined.

However, an important nuance to the duty of care liability is the “business judgment rule” theory. The idea of the business judgment rule protects an officer or director from a violation of their duty of care if they can show that they have acted in good faith and without a corrupt motive despite the unfortunate results of their actions or lack thereof.

Duty of Obedience

The duty of obedience outlines the bounds of an officer’s or director’s broad power over their corporate responsibilities. As mentioned before, an officer or director has broad authority over the operation of a corporation. However, this fiduciary duty states that they must still be within the limits of their delegated authority under the law and applicable governing corporate documents and not act beyond that scope.

Overall, a director or officer must act in a way that is consistent with the central goals of the corporation’s mission. This means that even though they have extensive decision-making power over the corporation’s operation, those arrangements must still comply with the goals of the corporation’s goals. The fiduciary duty of obedience acts as a gate that the officer or director must operate within.

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Legal Favor

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