WHAT IS A "FIDUCIARY DUTY" ?

• In general, a fiduciary duty is a duty imposed by law when one person has placed in another person the utmost trust and confidence to manage and protect property or money. It arises only when the confidence given by one person is actually accepted by the other person..

• The law imposes a fiduciary duty upon corporate directors. Thus, each director owes a legal duty of good faith, full disclosure, fair dealing, and undivided loyalty to the corporation.

• In other words, directors must positively renounce anything that is unfair.

• The fiduciary duty imposes a duty that is higher than the morals of the work-a-day world, the marketplace, and the trodden crowd.
  

PURPOSE OF FIDUCIARY DUTY:

• The purpose of the fiduciary duty is to remove all temptation since it recognizes the weakness and frailty of human nature.

• A breach typically occurs where directors or officers self deal to their own benefit and to the detriment of the corporation.
  

TYPES OF FIDUCIARY DUTIES:

• Conflict of Interest: this potentially can occur whenever the corporation is considering entering into a contract with one of its board members (e.g. a lease, an employment contract, sale of stock, etc.). The affected board member in such a situation has a potential for divided loyalties.


AVOIDING PERSONAL LIABILITY WHEN A POTENTIAL CONFLICT ARISES:  when a vote is taken at a director's meeting where a director faces a conflict of interest, the director in question should follow the procedures outlined below and then insist that the minutes document that these steps were properly taken.


• the minutes should show that the board member disclosed the potential conflict.


• the minutes should reflect that there was a full discussion about how the proposed deal was in the best interests of the corporation


• The minutes should show that the director with the conflict abstained from the vote (or better yet, left the room for the discussion and vote).


• The bottom line, however, is that the proposed transaction must actually be in the best interest of the corporation.

If a director violates his or her fiduciary duty by voting at a board meeting despite the presence of a conflict of interest that director may later be found liable by a court for any damages suffered by the corporation, BUT, the vote itself is otherwise valid vote of the board of directors despite the existence of a conflict of interest on the part of one or more directors.

• Duty of Loyalty: A director has a duty to act for the benefit of the corporation. A director's fiduciary duty is one of undivided loyalty to the company on whose board he or she sits. That duty encompasses all of the elements of loyalty, care and fair dealing implicit in a fiduciary relationship.
  

• The Duty to Act in Good Faith: Directors must act in the best interests of the corporation and its members or stockholders. More specifically, the Duty to Act in Good Faith prohibits members of the board of directors from: (1) failing to act in the face of a known duty to act; (2) acting in a manner unrelated to a pursuit of the corporation’s best interest; and (3) maintaining a sustained or systematic failure to provide oversight.

• Competing With the Corporation:  Violates that fundamentals of duty of undivided loyalty.

• Usurpation of Corporate Opportunity: directors cannot divert for themselves business opportunities that rightfully belong to the corporation.