What Are Fiduciary Duties That Apply To Businesses?

In certain situations, an individual’s position of relatively greater knowledge and power imposes on that individual a higher duty of care toward others who can be adversely affected if that greater awareness and power is abused. This higher duty — it is, in fact, the highest duty of care under the legal systems in the United States generally and in Texas as well — is known as a fiduciary duty.

Those who owe a fiduciary duty — fiduciaries — must act solely in the interests of those to whom the duty is owed. Examples of fiduciary duties include the duty that an attorney owes to his client, or a guardian owes to a person under his care.

Fiduciary duties also apply to the business world, including the duty of care that directors of a corporation owe to the company and its shareholders. Corporate officers, as agents of the company, have also been held to the fiduciary standard, but shareholders do not owe a fiduciary duty to one another.

Texas courts that have interpreted the Business Organizations Code of this state have broken down the fiduciary duty of directors and officers into three subcategories:

A duty of obedience. This is the duty not to engage in illegal or self-dealing acts. The duty of obedience also applies to directors and officers who have actual (as opposed to constructive) knowledge of such acts.
A duty of care. A director or officer must perform his duties to the corporation with the same degree of care as a reasonably prudent person would under similar circumstances. In other words, the fiduciary duty is a duty not to mismanage the corporation.

A duty of loyalty. This requires directors and officers not to create situations in which a conflict arises between their duty toward the best interests of the corporation and shareholders and their own self-interest. The two most common ways that people run into trouble with this duty are situations involving self-dealing and usurpation of corporate opportunities.

This post is only a brief introduction to the topic of business fiduciary duty. It is not comprehensive in its treatment, and must not be taken as legal advice. If you have questions or concerns about this topic, we recommend that you communicate them to an attorney who practices in business and commercial matters.

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