Trust is essential in a business, especially when dealing with complex financial matters. For many business relationships, the law establishes a fiduciary duty. This is the responsibility of one person or group (the fiduciary) to act in the best interest of another (the principal). For example, in a company, the directors and officers have a duty to make decisions that benefit the company and its shareholders, not themselves.
However, there are cases when fiduciaries misuse their position or neglect their responsibilities. Depending on the specific circumstances and resulting harm, this may be a breach of fiduciary duty. When such breaches occur, affected parties or the company itself have the right to take legal action.
Existence of a fiduciary relationship
To prove that a breach occurred, it’s important to first establish that a fiduciary relationship existed in the first place. For businesses, this can include:
- Board members’ relationship with shareholders
- Executive officers’ relationship with the company
- Partners’ relationships in a joint venture
The key is that one party places trust and confidence in another to act on their behalf.
Failure to fulfill the duty
A breach occurs when the fiduciary fails to act in the best interest of the business. Common breaches include:
- Using company resources for personal gain
- Competing with the company or starting a rival business while still employed
- Disclosure of confidential information or sharing trade secrets with competitors
For instance, if a company’s Chief Technology Officer (CTO) uses proprietary technology to start their own competing business, this would likely constitute a breach of fiduciary duty.
Resulting harm to the business
For a breach to be actionable, it must cause actual damage to the company. This harm could manifest as:
- Financial losses or direct monetary damage to the company
- Damaged business relationships and the loss of key clients or partners
- Lost opportunities for growth or profit
For example, if a CFO’s breach leads to the loss of a major investment opportunity, the company could claim this as the harm resulting from the breach.
Protect your business
Breaches of fiduciary duty can bring serious damage to your business. If you are worried about a possible breach, consider talking to an attorney. They can help you find ways to protect your company and its assets.