In the corporate world, it can be common for individuals to want to act in their own self-interest, rather than for the benefit of the company or its owners. However, they must be aware and cautious of their fiduciary duties when making certain decisions.
What are Fiduciary Duties?
Fiduciary duties are a set of obligations that require an individual to act in the best interests of the entity and its owners. They can be triggered by law or by virtue of the relationship itself and are created when one party must trust and rely on another to exercise their judgment.
What are the Different Types of Fiduciary Duties?
There are several types of fiduciary duties, including:
- Duty of Care: The duty of care requires a fiduciary to use informed business judgments when making business decisions.
- Duty of Candor: The duty of candor requires a fiduciary to disclose material information that may negatively affect the business. This typically involves interactions between board members, shareholders, and management of a company.
- Duty of Loyalty: The duty of loyalty requires a fiduciary to act honestly and in good faith with a view to the best interests of the party owed such duty (i.e. the business). This prohibits a fiduciary from putting their personal financial interests ahead of a party that is owed such duty. The duty of loyalty includes the duty of good faith and fair dealing, which places the obligation to act honestly when performing their duties on behalf of the entity.
Can Fiduciary Duties be Waived?
In certain circumstances, fiduciary duties may be waived. The ability to waive these duties depends on the company’s legal entity type and where it was incorporated. The duties of care and loyalty of managers and members of a limited liability company (“LLC”) vary by state. Companiesand their owners (whether shareholders or members) must be aware of such state-specific limitations and negotiate corporate documents tailored to their specific needs.
I. Delaware LLCs
In Delaware, operating agreements can waive a manager’s fiduciary only if the intent to waive is clear and unambiguous in the operating agreement. Even when an LLC’s operating agreement disclaims fiduciary duties, however, the covenant of good faith and fair dealing will remain implicit in such an agreement, as the covenant is non-waivable.
II. Delaware Corporations
By contrast, Delaware common law has established that directors owe fiduciary duties of due care and loyalty to a corporation and its stockholders. These duties cannot be disclaimed or modified by agreement in the context of a corporation. Directors should also be independent and not have a material relationship with another party that could influence the director’s decision-making.
Limited Exception
As a limited exception, Delaware corporations can waive certain fiduciary duties with a “corporate opportunity waiver.” A company can accomplish such action by referencing Section 122(17) of the Delaware Corporation Law in its certificate of incorporation. Typically, directors are prohibited from personally benefitting from an opportunity that is aligned with the corporation’s business. However, the corporate opportunity waiver allows corporate fiduciaries to invest in such opportunities without the obligation of disclosing them to the corporation or obtaining its approval. This waiver can only be invoked if the corporate opportunity satisfies certain criteria, such as (1) being unrelated to the corporation’s current or prospective business activities, (2) not being presented to the fiduciary in his or her official capacity, and (3) not being obtained with corporate resources or information. Even with the waiver, the fiduciary must still act in good faith and not use his or her position to gain an unfair advantage over the corporation.
Conclusion
It is important to note that the corporate opportunity doctrine and waiver vary by jurisdiction and can be complex. If you are a corporate fiduciary, or are considering investing in a business opportunity that could potentially conflict with your duties to a corporation, it is advisable to consult with a qualified attorney to ensure compliance with the applicable laws and regulations.
