A fiduciary is one who acts legally on behalf and in the best interests of another. Corporate promoters, boards of directors, officers and shareholders all have certain fiduciary responsibilities.

Fiduciary Responsibilities of Promoter

A promoter is a person or an entity that takes active steps in the formation, organization or financing of a corporation. The promoter stands in a fiduciary relationship to co-promoters, if any, to the corporation to be formed and to its subscribers, which are the investors who agree to buy the initial shares of stock in the corporation.

A promoter is generally under an obligation to do nothing that would conflict with the interests of those to whom his obligations extend and to do those things that would best serve their interests. The promoter assumes the position of a corporation fiduciary when he undertakes to act to organize a projected corporation.

Promoters are to exercise perfect candor, utmost good faith and the strictest honesty in promotional transactions. Breach of a fiduciary duty by a promoter is a fraud upon the corporation and upon those to whom the duty extends.

A promoter is legally charged with an affirmative duty to disclose an interest in any transaction with the corporation. The duty of the disclosure extends to those persons with whom the promoter stands in a fiduciary relationship: that is, co-promoters and the corporation to be formed. Disclosure to the corporation to be formed may be made by disclosure to:

  • An independent board of directors
  • All stockholders or subscribers at the time of the transaction in question
  • In a majority of states, all future stockholders or subscribers of originally issued stock contemplated by the promotional scheme

An example of a promoter's breach of fiduciary responsibilities is if the promoter transferred overvalued property to the corporation in return for corporate stock without disclosing all of the elements of the transaction to all interested parties.

Fiduciary Duties of Board of Directors

Every board member owes a legal duty of good faith, full disclosure, fair dealing and undivided loyalty to the corporation. Directors must positively renounce anything that is unfair. A breach or violation of this duty typically occurs where directors or officers self deal to their own benefit and to the detriment of the corporation.

A conflict of interest may occur whenever the corporation is considering entering into a contract with one of its board members (a lease, an employment contract, sale of stock and so forth). The affected board member in such a situation has a potential for divided loyalties. To avoid problems, the minutes should show that the board member disclosed the potential conflict, that there was a full discussion about how the proposed deal was in the best interests of the corporation and that the board member with the conflict abstained from the vote. The proposed transaction must actually be in the best interest of the corporation.

Directors must act in the best interests of the corporation and its members or stockholders. More specifically, the duty to act in good faith prohibits members of the board of directors from:

  • Failing to act in the face of a known duty to act
  • Acting in a manner unrelated to a pursuit of the corporation's best interest
  • Maintaining a sustained or systematic failure to provide oversight

Fiduciary Duties of Officers

The board of directors is not obligated to direct the day-to-day affairs of the corporation. Because most corporate statutes provide that the business and affairs of a corporation can be managed ''under the direction of a board of directors,'' most boards of directors delegate responsibility for the day-to-day oversight of the business of the enterprise to officers and, through such officers, to the other employees of the corporation.

Due to the fiduciary relationship that exists between a corporation's directors and officers and the corporation's shareholders, refusal on the part of corporate officers to permit the stockholders access to the corporate records and books may be considered a breach of the fiduciary responsibility of officers. The policy of allowing generous access to corporate records recognizes the possessory or membership interests held by individual shareholders in the corporate entity.

Fiduciary Duties of Shareholders

Shareholders are generally prohibited from directly controlling the business of the corporation. Their control, to the extent it may be exercised at all, is indirect. Their primary source of control is the power to elect the members of the board of directors.

Majority or control shareholders may be subjected to personal liability when they vote their shares to perpetrate fraud on other shareholders. Shareholders may be personally liable for damages resulting from the breach of their fiduciary duties either to the corporation or to minority shareholders.

Controlling shareholders owe a duty of loyalty to the minority shareholders of a corporation. This duty generally applies when a controlling shareholder engages in transactions with the corporation. In such cases, the relationship with the minority shareholders must meet the test of intrinsic fairness. Under this standard, the controlling shareholder must show that its transactions with the corporation were objectively fair. The standard applies only when the controlling shareholder stands on both sides of a transaction and only if the controlling shareholder receives something from the subsidiary to the exclusion of, and detriment to, the minority stockholders of the subsidiary.

Tagged as: Business Law, Small Business Law, fiduciary responsibility, corporation