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What happens if a business partner violates their fiduciary duty?

On Behalf of | Dec 7, 2023 | Business Litigation |

Starting a business with another person means placing a lot of trust in that individual. An individual generally trusts that anyone with whom they start a business will fulfill their obligations and act in the best interest of the company. Unfortunately, not every business venture involves partners with the same goals and the same sense of ethics. Occasionally, one business partner may find themselves in a difficult scenario in which they believe that the other has breached their fiduciary duty to the organization that they own jointly.

How can a business owner respond to a likely breach of fiduciary duty on the part of their partner?

Evaluating the situation carefully

Many previously healthy working relationships have ended up destroyed by one partner’s unfounded accusations. Conducting a thorough investigation is necessary when there is a suspicion that a business partner may have breached their fiduciary duty to the jointly owned organization. Having a fiduciary duty to the business means that each business partner should put what is best for the company ahead of their own enrichment. Cases involving embezzlement, nepotism and self-dealing are all examples of a breach of fiduciary duty that could damage the organization and the relationship between the partners.

They may need to take legal action

Sometimes, confronting a partner about inappropriate conduct will lead to them voluntarily correcting their habits and possibly even compensating the business for any harm they have caused. They may agree to negotiate an amicable exit from the organization so that their partner can run it without fear of continued misconduct in the future.

In scenarios where a partner refuses to take personal responsibility for their misconduct or will likely continue to engage in the same kind of behavior, the other partner may have no choice but to take the matter to court. Civil litigation could lead to a successful buyout and possibly even a judge’s order to compensate the organization for the harm caused due to the breach of duty. The partner filing the lawsuit will usually need to present the court with evidence including their partnership agreement and the documentation affirming misconduct. The process can be lengthy but can help protect the company from ongoing misconduct.

Responding appropriately to a partner’s breach of fiduciary duties can diminish the long-term impact that their bad behavior could have on the organization’s finances and overall success. Ultimately, seeking legal guidance is a good way to gain clarity and support in the wake of discovering the possibility of a partner’s breach of their fiduciary duty.