What Directors & Officers of Illinois business need to know about their fiduciary duties.
If you are an officer or a director of a business, you’ve probably heard that you have “fiduciary duties” but do you actually know what that means? Most president’s I talk to have no idea about the “corporate opportunity doctrine” or that a duty of loyalty can essentially become a non-compete. Directors and officers should be aware that they have fiduciary responsibilities to others in the corporation and to the corporation itself. Fiduciary duties in a corporate setting require directors and officers to apply their best business judgment, to act in good faith, and to promote the best interests of the corporation.
We will be posting various articles about fiduciary obligations over the next few months. But to get the ball started, here’s a 101 on your obligations. If you have any questions, give us a call. It is important to seek legal counsel if you are unsure about your fiduciary obligations or if you suspect that another officer or director has violated their fiduciary obligations to you or the corporation. Violations of fiduciary obligations are serious and can lead to extensive damages, including the complete forfeiture of compensation received by the officer/director during the period of the fiduciary breach.
Basic Fiduciary Duties
- Duty of Care– Directors and officers must use care and be diligent when making decisions on behalf of the corporation and its shareholders. Directors and officers meet their duty of care if they act:
- In good faith
- With the care of a reasonable person in like position
- With reasonable belief their decisions are in the best interest of the corporation.
- Duty of Loyalty– Directors and officers must have an undivided duty of loyalty to the corporation and shareholders. In another words, they must put the interests of shareholders and the corporation above their own interests. There are several examples for how the duty of loyalty can be violated:
- Gaining secret profit belonging to the corporation
- Competing with the corporation
- Seizing corporate opportunity
- Self-dealing with the corporation
- Duty of Good Faith– The duty of good faith is encompassed within the duty of loyalty because to act in good faith is essentially a “condition” to the duty of loyalty. A violation of the duty of good faith can be explained as a “conscious disregard” or “intentional neglect of duty.”
- Duty of Disclosure –This duty is derived from the duties of care and loyalty. This duty can be breached by:
- Making a materially false statement
- Omitting a material fact
- Making a partial disclosure that is materially misleading.
The Business Judgment Rule
There is an important caveat to the potential fiduciary liabilities of directors and officers. This is known as the business judgment rule. Under the business judgment rule, officers and directors are not liable for a decision that results in harm to the corporation as long as they acted reasonably under the circumstances. In most states, the business judgment rule creates a presumption that in making a business decision, the officers/directors were reasonably informed, acted in good faith, and that the action taken was in the corporation’s best interests. As long as there was no gross negligence or self-dealing in the decision-making process, officers/directors generally will not be held liable for bad decisions or mistakes that result in harm to the corporation. This rule was intended to protect from errors in judgments and mistakes.
Again, this article is intended to be an introduction to the concept of fiduciary duties. Future articles will dive into concepts of the corporate opportunity doctrine, business torts that go hand in hand with your fiduciary duties and how your obligations continue even after you have separated from the business.
In the meantime, should you have any questions about fiduciary duties or any other laws that may affect your business, or would like to schedule a free initial consultation, please contact Waltz, Palmer & Dawson, LLC at (847)253-8800 or contact us online.
Waltz, Palmer & Dawson, LLC is a full-service law firm with various areas of service to assist your business, including: Employment Law, Intellectual Property, Commercial Real Estate, Business Immigration, Litigation and general Business Law services. Individual services include Estate Planning, Wills and Trusts, Probate, Guardianship, Divorce and Family Law.
This article constitutes attorney advertising. The material is for informational purposes only and does not constitute legal advice.
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