Corporate officers, partners in a partnership, and members of a limited liability company owe a fiduciary duty to the principal, i.e., the business entity, to act in the best interest of the organization. Failure to act in the principal’s best interest or actively competing against the principal to which a fiduciary duty is owed exposes the fiduciary, the agent of the principal, to civil liability. Care must be taken by the fiduciary not to compete against the organization to which they owe their duty of loyalty. The Silicon Valley Business Attorneys’s at Structure Law Group, LLP are highly experienced in preventing and resolving corporate disputes that may arise from a breach of fiduciary duty.
The foundational tenet of agency law is the duty of loyalty owed by the agent, or fiduciary, to the principal or business entity. The duty of loyalty obligates the fiduciary to act in the best interests of the principal. The duty of loyalty extends to “all matters connected with the fiduciary relationship.” Thus, the duty of loyalty prohibits fiduciaries from obtaining a benefit from others as a result of the fiduciary relationship. This prohibition extends to all dealings in which the fiduciary is involved on behalf of the principal. The duty to act with loyalty is not limited to financial matters.
The fiduciary’s duty of loyalty encompasses situations involving parties adverse to the principal. The fiduciary has an absolute duty not to act on behalf of a third party whose interests are adverse to those of the principal. The fiduciary is duty-bound not to compete, either personally or on behalf of, another entity. The agent’s obligations last for the entire duration, and in some instances depending on contract language, last beyond the termination of the fiduciary’s relationship with the principal. However, agency law does provide for the fiduciary to plan and prepare to leave the principal, even to then compete with the principal. Notwithstanding, the action taken by the fiduciary must not violate any other duty owed to the principal.
In addition to the duty of loyalty, the fiduciary owes the principal additional fiduciary duties. A fiduciary has a duty to refrain from using the principal’s property for the benefit of another. In other words, the fiduciary may not misappropriate client lists or other intellectual property owned by the principal. Additionally, the fiduciary must not disclose confidential information to a third party to the detriment of the principal. By way of example, a fiduciary is liable to the principal for a breach of the duty to maintain confidences by disclosing trade secrets of the principal to a third party.
Given the numerous relationships that develop in business daily, a fiduciary-principal relationship can occur in various situations. In California, a fiduciary relationship commences when one party provides confidential information to another in a business transaction. The recipient of the confidential information, if accepting of the duty, must then act loyally and in good faith toward the principal. The duty is beyond the standard obligations parties to a transaction have to one another to deal fairly. Rather, there is a moral obligation to act with undivided loyalty for the principal’s benefit. In the corporate setting, directors or officers of the corporation are fiduciaries and owe the corporation the duty of loyalty. In the partnership or LLC setting, the partners or members owe each other that same duty.
Silicon Valley Business Attorneys Can Help Solve Disputes Between Fiduciaries and Principals
The attorneys of Structure Law Group, LLP have vast experience counseling business entities on fiduciary matters and resolving disputes occurring within the corporate structure. If you are a business start-up or an established business, call Structure Law Group, LLP today at 408-441-7500 to schedule an appointment. Structure Law Group’s business attorneys have the experience necessary to limit your exposure to litigation while helping your business grow.