fiduciary duty

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When someone has a fiduciary duty to someone else, the person with the duty must act in a way that will benefit someone else, usually 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, he or she 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.” Smith v. Van Gorkem, 488 A.2d 858 (1985).

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.” Moran v. Household Intern., Inc., 490 A.2d 1059 (1985).

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. Smith v. Van Gorkem, 488 A.2d 858 (1985).

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

Under the duty of good faith, a corporation's directors and officers must advance interests of the corporation and fulfill their duties without violating the law. In re The Walt Disney Co. Derivative Litig., 906 A.2d 27 (Del. 2006).

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. Guth v. Loft, Inc., 5 A.2d 503 (Del. 1939).

Duty of Prudence

Under the duty of prudence, a trustee must administer a trust with a degree of care, skill, and caution that a prudent trustee would exercise. Amgen Inc. v. Harris, 577 U.S. __ (2016).

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. Amgen Inc. v. Harris, 577 U.S. __ (2016).

Charities and Fiduciary Duty

Some courts have not required officers of a charity to abide by the same rules as corporate officers. For example, an officer may be allowed to deal in a manner financially advantageous to himself or herself, so long as the charity is not subject to any expense. This does not mean, however, that an officer of a charity is permitted to divert earning capacity of his charity to himself. Boston Athletic Assoc. v. Int’l Marathons, Inc., 392 Mass. 356 (1984); Samuel & Jessie Kenney Presbyterian Home v. State, 174 Wash. 19 (1933).

Fiduciary or Confidential Relations

Certain relationships impose fiduciary duties. For example, attorneys have a fiduciary duty to their client, a principal to his agent, a guardian to his ward, a priest to his parishioner, and a doctor to his 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.

Further Reading

For more on the fiduciary duty, see this Florida State University Law Review article, this Florida Bar Association article, and this UCLA Law Review article.