A concept that frequently comes up in shareholder and partner disputes is that of fiduciary duty. In legal contexts, fiduciary duty means the obligation you have to act in someone else’s best interest. The executor of an estate, for example, has the duty to act in accordance with the wishes of the decedent and for the benefit of the estate’s beneficiaries. An executor who instead enriched themselves with estate assets would have violated that duty.
In a corporate context, all employees of a business have some fiduciary duty toward the company. For regular employees, this duty is fairly minor. In general, Illinois case law on employee fiduciary duty has focused on issues like trade secrets. For directors and officers of the company, individuals with much greater direct control over the business’s assets than an ordinary employee, their fiduciary duty is much expanded. Directors and officers have the duty to act in the company’s best interest. Violating that duty presents a cause of action for the company’s shareholders and such a case can result in court intervention into the company.
The next question, of course, is just what constitutes a breach of fiduciary duty. If a director of a company decides to launch a new product line and that ends up a disaster for the company, does that constitute a breach? The relevant question is not the results of the action per se (although if a breach is proved, then the results matter for determining damages) but instead the intention behind them. A good faith effort that simply didn’t pan out isn’t a breach of fiduciary duty.
In Illinois, the process works like this. As a starting point, the directors and officers of a company are presumed to be acting in good faith with the best interests of the company in mind. Someone wishing to allege otherwise has the burden of demonstrating so in court, presenting evidence contrary to that presumption. Once sufficient evidence has been presented to overcome the presumption, the burden rests upon the director or officer or other person or persons holding the fiduciary duty to prove the validity of their actions.
In fiduciary duty cases, these steps of proof usually go on a transaction by transaction basis. That is, the plaintiff points to a specific transaction or decision and alleges its impropriety. Once this allegation has a sufficient base of evidence, then the burden shifts to the defendant to argue why the transaction or decision was in fact legitimate. To take a simple hypothetical example, the plaintiff might point to a meal at an expense restaurant as a waste of corporate funds and the defendant answer that the charge was incurred taking a client out to dinner. Of course the specifics will vary case to case and there are no hard and fast rules on what exactly will qualify as a legitimate business purpose in the eyes of the court, except for the assumption of good faith. Again, until evidence is presented counter to that assumption, the directors and officers are assumed to be acting in good faith with the best intentions of the company in mind.
If a breach of fiduciary duty can be proved, the affected party can recover damages.
Horowitz Law Offices has represented numerous partners and shareholders to resolve their difficult disputes. You are welcome to contact us at (312) 787-5533 or firstname.lastname@example.org