What is a Fiduciary?

posted by Michael Fortney  |  Dec 21, 2011 1:58 PM in Business Litigation

What is a Fiduciary?

The majority or controlling shareholder in a close corporation owes his or her other co-shareholders fiduciary duties.  A fiduciary is defined at common law as a person having a duty, created by his undertaking, to act primarily for the benefit of another in matters connected with such undertaking. Stock v. Pressnell.  Fiduciary obligations are imposed by operation of law in the corporate context when, due to their small number, minority shareholders or partners are unable to protect their financial interest because of the absence of a readily available market to sell their ownership interest.

Fiduciary duties impose an obligation of utmost good faith and loyalty to the minority owners, requiring each partner to consult and inform his co-owner as to ownership matters and requires minority/non-controlling shareholders to have an equal opportunity in the corporation.  Leigh v. Crescent square, Ltd.

Fiduciary duties prohibit the majority owner from using his power to promote his personal interests at the expense of corporate interests by, for example, paying large salaries or bonuses to the majority owner only or charging the business high rent for property leased from the majority owner.  The majority shareholder must refrain from obtaining personal profit from confidential business matters and from participating in activities which are in direct conflict with the business’ interests.  Furthermore, a majority shareholder cannot unilaterally fire a shareholder/employee without a legitimate business justification, i.e. minority shareholder/employees are not employees-at-will.  Gigax v Repka.  

The imposition of fiduciary obligations is not imposed solely on the majority shareholder. Fiduciary obligations are also imposed on equal shareholders.  Crosby v. Beam; Morrison v. Gugle.  The critical question is whether one shareholder so dominated the corporation that he can be said to have been in control to the exclusion of the other.  Morrison, supra.  For example, in Soulas v. Troy Donut Univ. Inc., two of three equal shareholders increased their salaries (far in excess of industry standards) without notice to the third shareholder.  The court concluded that the “minority” shareholder had a cause of action against the controlling shareholders for attempting to divert corporate profits to themselves at the expense of the minority.  Fiduciary duties also arise in partnerships (Arapadi v. First MSP Corp.) and limited liability companies (All Star Land Title Agency, Inc. v. Surewin Inv., Inc.).

An action or breach of fiduciary duty is basically a claim for negligence that involves a higher standard of care.  In order to recover, a shareholder must show the existence of a duty on the part of the alleged wrongdoer not to subject the claimant to the injury complained of, a failure to observe such duty, and an injury proximately resulting therefrom.  Compensatory and punitive damages may be awarded for a breach of fiduciary duties and injunctive relief can be obtained to prevent a further breach of fiduciary duties.


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