Helping Your Business Thrive

  1. Home
  2.  · 
  3. Business Litigation
  4.  · Can a breach of fiduciary duty cause shareholder disputes?

Can a breach of fiduciary duty cause shareholder disputes?

On Behalf of | May 23, 2023 | Business Litigation

No business is immune to disagreements. Your financial stake in the company as a shareholder makes it normal for you to challenge the decisions of the corporation’s board. But when a falling out goes beyond the usual tensions and alleges certain breaches of agreements and duties, it may escalate into a shareholder dispute.

Corporate fiduciary duties

Shareholder disputes impact the operations and finances of the business. It is then imperative to learn what causes such conflicts so you know what to avoid as well as to protect your rights and interests.

One of the most common causes of a shareholder dispute is the breach of fiduciary duty. A fiduciary duty is an obligation of the corporation’s officers and directors to act in the best interests of both the company and its shareholders. States like Kentucky impose high standards in upholding fiduciary duties categorized into three main types.

  • Duty of care: Fiduciaries must ensure they did everything in their power to gather pertinent information to make a well-informed decision. For instance, before hiring anyone in an executive-level position, they must have done a comprehensive vetting procedure, including a background investigation and reference checking.
  • Duty of loyalty: Fiduciaries must place the corporation’s interests above their own. If they anticipate a conflict of interest, they must disclose it to the rest of the board to discuss a course of action moving forward. For example, they cannot “self-deal” by recommending or engaging in the services of another company or individual they have a personal stake in. In the same breadth, they cannot use the company’s funds for their personal expenses.
  • Duty of good faith: Fiduciaries must execute the age-old saying that honesty is the best policy. Case in point, they intentionally or consciously withhold critical financial or criminal information about an applicant.

Courts usually presume that fiduciaries act with reasonable care, loyalty and good faith. Thus, as a shareholder, you have the burden to prove that the fiduciaries owed you these duties and failed to enact them accordingly. Additionally, it would help to show that you lost money or there were other damages incurred due to such failure of duty.

Err on the side of caution

When in doubt, it is imperative to know your case’s complex legalities and seek potential remedies. A legal counsel can help you unpack and interpret the shareholder agreement and identify if you can file a lawsuit.