In general terms, a fiduciary duty is an obligation to act in the best interest of another party. The person acting in this capacity is held to a higher standard of honesty and full disclosure concerning the client than would otherwise have been expected. It is imperative they must not personally gain at the expense of the client.
Fiduciary duties and responsibilities may include monitoring, distribution, administration, and investment of property. These actions are judged under the business judgement rule. in mergers and acquisitions, directors will have a duty to obtain the best deal for shareholders. In a hostile takeover, directors must still act on behalf of the shareholders and not in their own interests. Additional considerations also include intangible assets such as reputation and company standing within the local community.
The Three Elements of Fiduciary Duty
The board of directors have a fiduciary duty as they can be considered trustees for the owners of the business, i.e. the shareholders. Specific duties include:
The Duty of Care
Requires control persons to act on an informed basis after due consideration of all information and that persons reasonably inform themselves of alternatives. They may rely on employees and other advisers so long as they do so with a critical eye and do not unquestionably accept the information and conclusions provided to them.
The Duty of Loyalty
To look to the interests of the company and its other owners and not to their personal interests. They cannot use their positions of trust, confidence and inside knowledge to further their own private interests or approve an action that will provide them with a personal benefit.
The Duty of Good Faith
Exercise care and prudence in making business decisions, in other words, the care that a reasonably prudent person in a similar position would use under similar circumstances. The fiduciary duty to act in good faith is an obligation not only to make decisions free from self-interest, but also free of any interest that diverts the control persons from acting in the best interest of the company. The higher the level of expertise, the more accountable that person will be. In the case of finance, an expert may be held to a more exacting standard than others in accepting a third party valuation.
