When it comes to the notion of holding corporate officers and directors accountable for malfeasance, the unfortunate reality is that many shareholders believe that they are without recourse.
This is not the case, however, as the law has long held that corporate officers and directors along with controlling shareholders owe what is known as a fiduciary duty to the corporation and, by extension, its shareholders.
What is a fiduciary duty?
A fiduciary duty can either be expressly created by the law — i.e., statute, contract or legal proceedings — or established by the type of relationship that exists between parties, and which governs their transactions.
In the latter scenario, this typically involves situations where a party places their complete confidence and trust in a second party concerning business transactions or other financial matters, and the second party is cognizant of this reality. By way of illustration, consider an accountant and her clients.
The party on whom a fiduciary duty is imposed — whether by law or by factual circumstances — has a legal obligation to always act in the best interests of those to whom the fiduciary duty is owed.
How exactly does this apply to corporate officers and directors?
In general, the corporate fiduciary duties owed by officers and directors to shareholders can be broken down into two primary components: the duty of care and the duty of loyalty.
What is the duty of care?
The duty of care essentially mandates that officers and directors must execute their duties in a manner that they believe is in the best interests of the corporation, and which is in line with the level of care typically exercised by ordinary, prudent people occupying similar positions.
We will continue this discussion in future posts, further examining the duty of care and outlining the duty of loyalty. To learn more or examine litigation options as they relate to business torts, please consider speaking with an experienced legal professional.
Source: The American Bar Association, “Breach of fiduciary duties,” Robert Kutcher, Accessed April 16, 2015