When someone has a fiduciary duty to someone else, the person with the duty must act in a way that will benefit someone else financially.
The person who has a fiduciary duty is called the fiduciary, and the person to whom the duty is owed is called the principal or the beneficiary. If the fiduciary breaches the fiduciary duties, the fiduciary would need to account for the ill-gotten profit. The beneficiaries are typically entitled to damages.
Corporations and Fiduciary Duties
Directors of corporations, in fulfilling their managerial responsibilities, are charged with certain fiduciary duties. The primary duties are the duty of care and the duty of loyalty.
Duty of Care
The duty of care requires that directors inform themselves “prior to making a business decision, of all material information reasonably available to them.”
Whether the directors were informed of all material information depends on the quality of the information, the advice available, and whether the directors had “sufficient opportunity to acquire knowledge concerning the problem before action.”
Moreover, a director may not simply accept the information presented. Rather, the director must assess the information with a “critical eye,” so as to protect the interests of the corporations and its stockholders.
Duty of Loyalty
The duty of loyalty means that all directors and officers of a corporation working in their capacities as corporate fiduciaries must act without personal economic conflict. As the Delaware Supreme Court explained in Guth v. Loft, 5 A.2d 503, 510 (Del. 1939), “Corporate officers and directors are not permitted to use their position of trust and confidence to further their private interest."
Duty of Good Faith
Duty of Confidentiality
Under the duty of confidentiality, a corporation's directors and officers must keep corporate information confidential and not disclose it for their own benefit.
Duty of Prudence
Duty of Disclosure
This duty requires directors to act with “complete candor.” In certain circumstances, this requires the directors to disclose to the stockholders “all of the facts and circumstances” relevant to the directors’ decision.
Charities and Fiduciary Duty
Some courts have not required officers of a charity to abide by the same rules as corporate officers. For example, officers may be allowed to deal in a manner financially advantageous to themselves, so long as the charity is not subject to any expense. This does not mean, however, that officers of a charity are permitted to divert the earning capacity of the charity to themselves.
Fiduciary or Confidential Relations
Certain relationships impose fiduciary duties. For example, attorneys have a fiduciary duty to their clients, a principal to an agent, a guardian to the ward, a priest to the parishioner, and a doctor to the patient. Fiduciary duty is imposed whenever confidence is reposed on one side in a contractual relationship, so as to allow that side to exert influence and dominance over the other.
[Last updated in December of 2022 by the Wex Definitions Team]
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