A “fiduciary” is someone who has an obligation to act in the best interests of another person or entity. These duties can be established either by law or by the nature of the relationship itself. They generally arise when one party must place their trust and reliance on another to exercise sound judgment. Fiduciary duties impose a responsibility on individuals entrusted with critical decision-making for an organization to always act in the organization’s and its owners’’ best interests.
Although fiduciary duties may seem absolute, sometimes they may be waived. The ability to waive these duties is contingent on the legal structure of the company and the laws of the state where it was incorporated.
The Different Types of Fiduciary Duties
A company’s manager or director owes fiduciary duties to the company and its stakeholders. Some basic fiduciary duties include:
- Duty of Care – the duty of care requires a fiduciary to use his or her informed business judgment in their role of overseeing the company and making business decisions.
- Duty of Candor – the duty of candor requires a fiduciary to disclose material information to the shareholders.
- Duty of Loyalty – the duty of loyalty typically includes subsidiary duties of good faith and oversight. These duties require a fiduciary to act honestly, on a disinterested and independent basis, in the best interests of a party owed such duty. This prohibits a fiduciary from putting their personal interests ahead of the company. A director’s intentional violation of law would be deemed a breach of fiduciary duty as such action subjects the company to liability.
Fiduciary Duties in Massachusetts
The fiduciary duties of a director or manager vary by state. Certain states allow for waivers or limitations of fiduciary duties by contract. Other states prohibit the waiver of any fiduciary duty. Companies, corporations, and their owners (whether shareholders or members), must be aware of such state-specific limitations and draft corporate documents to meet their needs.
Limited Liability Companies (LLCs)
Under Massachusetts’ General Law (Part I, Title XXII, Ch. 156C, Sect. 63), members of an LLC owe a fiduciary duty to the company itself and to other members or managers. Further, the statute states that any duties may be expanded or restricted by provisions in the operating agreement. Thus, fiduciary duties may only be waived if the LLC agrees to do so in the company’s operating agreement. This can be included at the time of the document’s drafting or at a later date in which it is amended.
Corporations
Section 8.30 of the Massachusetts Business Corporation Act covers fiduciary duties for directors of corporations. The statute imposes a standard for the duty of care of corporate directors and officers on the corporation itself, not to individual shareholders. Similar to how duties may be waived in LLCs, directors of corporations in Massachusetts may waive their duties under a contract between shareholders.
Conclusion
Do your company’s corporate documents waive certain fiduciary duties? Depending on the state and entity type, those waivers may not be enforceable. Your company’s bylaws or operating agreements should always be drafted or negotiated with the assistance of season legal counsel to avoid potential pitfalls.
Contribution to this blog by Michael Touma.
