A “fiduciary” is someone who has an obligation to act in the best interests of another person or entity. These duties can be established either by law or by the nature of the relationship itself. They typically arise when one party must place their trust and reliance on another to exercise sound judgment. Fiduciary duties impose a responsibility on individuals (i.e., the fiduciaries) entrusted with critical decision-making for an organization to always act in the organization’s and its owners’ best interests.
What happens if a company’s manager prioritizes their personal interests over the well-being of the company and its stakeholders? The manager’s actions could lead to a claim of a breach of her fiduciary duties.
Although fiduciary duties may seem absolute, there are situations where they can be waived. The ability to waive these duties is contingent on the legal structure of the company and the laws of the state where it was incorporated.
The Different Types of Fiduciary Duties
A company’s manager or director owes fiduciary duties to the company and its stakeholders. Some basic fiduciary duties include:
- Duty of Care – The duty of care requires a fiduciary to use his or her informed business judgment in their role of overseeing the company and making business decisions.
- Duty of Candor – The duty of candor requires a fiduciary to disclose material information to the shareholders.
- Duty of Loyalty – The duty of loyalty typically includes subsidiary duties of good faith and oversight. These duties require a fiduciary to act honestly, on a disinterested and independent basis, in the best interests of a party owed such duty. This prohibits a fiduciary from putting their personal interests ahead of the company. A director’s intentional violation of law would be deemed a breach of fiduciary duty as such action subjects the company to liability.
Fiduciary Duties in California
The fiduciary duties of a director or manager vary by state. Certain states allow waivers or limitations of fiduciary duties by contract. Other states prohibit the waiver of any fiduciary duty. Companies, corporations, and their owners (whether shareholders of members), must be aware of such state-specific limitations and draft and corporate documents to meet their needs.
Limited Liability Companies (LLCs)
In California, an LLC will either be structured as a manager-managed LLC or a member-managed LLC. In a manager-managed LLC, members do not owe fiduciary duties to the LLC or any other members unless an operating agreement provides otherwise, while managers do. In a member-managed LLC, members owe duties of loyalty and care. This distinction makes it clear that fiduciary duties are only imposed on those in control of the LLC. According to the California Revised Uniform Limited Liability Company Act (RULLCA), an LLC’s operating agreement can modify (but not eliminate) the duty of loyalty, subject to a “not manifestly unreasonable standard.”
Corporations
California law expressly states that while directors of corporations can limit their personal liability for breaches of duty to the corporation or its shareholders, the duties of loyalty and good faith may not be limited or waived. California Corporations Code section 204(a) states that a corporation’s articles of incorporation may not “eliminate or limit the liability of directors” for acts or omissions that are in violation of the director’s (or officer’s) fiduciary duties to the corporation or its shareholders. However, directors may have additional protection under the business judgment rule.
Conclusion
Do your company’s corporate documents waive certain fiduciary duties? Depending on the state and entity type, those waivers may not be enforceable. Your company’s bylaws or operating agreements should always be drafted or negotiated with the assistance of seasoned legal counsel to avoid potential pitfalls.
Carlianna Dengel is admitted to practice law in New York and California.
