In BUSINESS DIVORCES: Keeping a Legal Inventory, we discussed how important it is for an owner of a company to know his legal rights — and legal wrongs — when a dispute erupts with other owners. Assessing those legal debits and credits and objectively calculating their net balance is particularly critical when one side owes (or both sides owe) a fiduciary duty he or they may have violated.
Beginning with this article and continuing with several future articles, I will try to illustrate the concept of fiduciary duty as it applies in private company settings. Except where noted otherwise, all illustrations will assume the Company is formed under Texas law. Before starting, however, I want to recommend that persons owning interests in private Texas companies also read two recent excellent short articles published by Ladd Hirsh of Winstead PC (Dallas):
Introducing the Aggrieved Owner and the Bad Actor
A Company owner thinks he has been personally wronged (the Aggrieved Owner) by a Company co-owner (the Bad Actor). Aggrieved Owner calls his attorney and is insistent that Bad Actor “breached his fiduciary duty to me and therefore owes me [enter substantial amount of damages].”
Aggrieved Owner’s lawyer replies that a breach of fiduciary claim requires three elements:
First Element: Bad Actor had a fiduciary duty to Aggrieved Owner;
Second Element: Bad Actor breached that duty; and
Third Element: The breach either caused Aggrieved Owner to suffer damages OR resulted in the Bad Actor’s receiving a benefit.
First Element: Existence of Fiduciary Duty Does Depend on Business Structure
Aggrieved Owner may be surprised when his lawyer tells him that whether Bad Actor owes him a fiduciary duty depends on the Company’s business structure.
- If the Company is a general partnership, then there’s good news for Aggrieved Owner: every general partner owes fiduciary duties to all of the other general partners AND to the partnership itself.
- If the Company is a limited partnership, the issue becomes a little complicated: the general partner owes fiduciary duties to the partnership and the limited partners; but the limited partners generally do not owe fiduciary duties to each other, the general partner or the partnership. Whether the client smiles or frowns depends on whether he is a limited or a general partner and whether Bad Actor is a limited or a general partner.
- If the Company is a corporation, Aggrieved Owner may become confused: directors and officers of the corporation owe fiduciary duties to the corporation but not to its shareholders, and shareholders generally owe no fiduciary duties to each other or the corporation.
- If the Company is a limited liability company, Aggrieved Owner may become slightly more confused: LLCs generally follow the same principles as a corporation, with managers and officers owing fiduciary duties to the LLC, but not the LLC’s members, and the members generally not owing fiduciary duties to each other or the LLC.
[When “generally” is used, it means “this is the default principle, but exceptions can occur.”]
First Element Continued: Nature of Fiduciary Duty Also Depends on Business Structure
Aggrieved Owner is put a little off balance by the unexpected complexity of his lawyer’s information. Asking whether the concept of “fiduciary duty” is as complicated, Aggrieved owner listens as his attorney begins his reply.
Aggrieved Owner quickly realizes that the answer is complicated enough and long enough to be the topic for a future article.