Violations of Corporate Fiduciary Duties

Jul 6, 2021

Violations of Corporate Fiduciary Duties

Now that you know what a fiduciary duty is, it is important to also understand how those duties can be violated, even (or especially) unintentionally because any breach of fiduciary duty violates the corporate governing documents as well as the law. Examples of violations of corporate fiduciary duties include the following:

  • Failing to act in a reasonable and prudent manner as a corporate fiduciary by responsibly reading and reviewing all corporate matter and materials related to a business decision;
  • Failing to appropriately supervise workers or staff resulting in litigation or financial harm to the business;
  • Failing to keep proper business or financial records resulting in harm to the business;
  • Failing to attend Board meetings or corporate meetings regularly to understand the business developments and circumstances of the company.

Intentional violations occur when a fiduciary puts their own interests ahead of those of the company including failing to disclose business opportunities that would allow the fiduciary to secretly obtain a profit when the company could have secured that profit instead and failing to disclose connections or dealings that are in a fiduciary’s self-interest that impact their decision making for a company.

The Protection of the Business Judgment Rule

In some cases, an officer or director of a company will make a corporate decision that ultimately causes financial or legal harm to the business. However, under the business judgment rule in Louisiana, when a corporate fiduciary makes a decision in good faith with a rational basis and a reasonable belief that their decision was truly in the best interest of the company, they will have a strong legal defense from liability even if their decision proves to be financially harmful or creates a loss for the company.

The doctrine of the “business judgment rule” embodies the basic reluctance of courts to interfere in corporate matters and to substitute their judgment for that of the officers and directors in managing corporate affairs. The business judgment rule is often a subjective one, and depends on the facts and circumstances of the decisions made by the corporate fiduciaries. Thus, courts typically analyze the process of decision-making, not the decision itself.

Louisiana jurisprudence offers protection to officers and directors if they act with prudence, reasonableness, and in good faith regarding their fiduciary decisions. This law is incredibly important, because, without it, many qualified and experienced business people would simply refuse to take the risk to become Board members or officers of companies for fear of personal liability or litigation from any business decision that may not work out.

The business judgment rule can even protect transactions that may otherwise be an intentional violation of an officer or director’s fiduciary duties– such as a transaction involving self-dealing (when the officer or director has a personal stake in a transaction with the company)– if the Board appoints a special committee of disinterested Board members to examine the advisability of the transaction and then the entire Board of Directors adopts the committee’s recommendation based on its own reasonable investigation.

Because the issues surrounding fiduciary duties and the business judgment rule are complex and fact specific, having good legal counsel for you and your business before making difficult decisions is critical. If you are interested in learning more about corporate fiduciary duties in the state of Louisiana, contact us at (504) 584-7336 or to learn more about how to be sure you handle these important legal responsibilities appropriately.