Business Law & Commercial Litigation
By the Business Attorneys at Garg & Associates, PC, serving The Woodlands, Spring, Houston, Conroe, Humble, Kingwood, Tomball, Cypress, Huntsville, Westchase, Southwest, Sugar Land, West Oaks, Alief, Memorial, River Oaks, Stafford, Katy, and Missouri City.

Breach of Fiduciary Duty

Fiduciary duty arises from a legal relationship between the Fiduciary and the Principal.   The fiduciary duty is the highest standard of care in which a person owes another which may arise from various situations, including an attorney and client relationship, a trustee and beneficiary relationship, a member of the Board of Directors of a corporations to shareholders, a real estate broker to his/her clients, and more often than not, a financial advisor and broker may owe the investors the fiduciary duty.  The clients, shareholders, beneficiary, or investors may have a cause of action when a fiduciary violates the duty of care, the duty of loyalty, the duty of candor, the duty not to conflict one’s representation, and the duty to act in good faith.  In fact, the word fiduciary comes from the Latin word “fides,” which means faith.  The question is, how would you k now when such duty arise and if there is a breach of one’s fiduciary duty?

Within the context of a corporation, members of the Board of Directors (“the Board”) owe the duties of care and the duty of loyalty to the corporation and its shareholders. These duties require the Board to act in good faith, with the care an ordinarily prudent person in a similar position would exercise under similar circumstances, and in a manner the Board reasonably believes to be in the best interest of the corporation and its shareholders.  The duty of care has the subjective and objective components. The duty of care is subjective because it recognizes that the duty varies based on the director's qualifications with regards to the complexity of the business and those of other board members. However, the duty of care is also objective because it requires of the director to act diligently with prudence, use common sense, be informed prior to make his or her decision and act reasonably as someone with like responsibility.  The duty of loyalty requires the Board to act in the corporation's best interests.  The duty of loyalty requires that the Board put the interest of the company above and beyond his or her interest or anyone else, including family members and friends.  That duty also requires the Board to act in good faith and fair dealing in the interest of the corporation.

When the Board of Directors is accused of breaching their fiduciary duties, the courts review their actions in accordance with the Business Judgment Rule ("BJR"). A court will not make its own decision as to what is or is not sound business judgment with regards to the operations of a business.  The court will refuse to review the actions of a corporation's board of directors in managing the corporation unless there is some allegation of conduct that the directors violated their duty of care or the duty of loyalty to manage the corporation to the best of their ability. Essentially, the question is whether the Board’s decision was prudence, informed, acted in good faith in the best interest of the corporation, does not conflict with the Board’s self-interest, and the Board was not wasteful. In making such decision, the court will review corporate procedures, guidelines, board resolutions, agreements, and may also look at generally accepted procedures with similar business within the industry.  Without clear evidence that the Board violated its duty of care or its duty of loyalty, courts will not consider whether a decision is good or bad on its business merits but will presume that the Board’s decision is based on BJR.

The plaintiff can rebut the presumption raised under the Best Judgment Rule, which is often a shareholder.  In rebutting the BJR, the experienced Houston commercial litigation attorneys at Garg & Associates will attack the underlying basis of the BJR.  That is, the Woodlands Business Litigation Attorneys will scrutinize the facts and evidence to allege that the decision of the Board was not prudence; the Board did not informed prior to making such decision; the Board did not act in good faith in the best interest of the corporation and perhaps committed fraud upon the corporation; the Board was hasty in its decision without carefully researching and inquire about the consequences; the Board’s made corporate decisions that conflicted with the Board’s self-interest; and the Board’s decision was wasteful. 

Should you have questions or concerns with regard to the decision of the Board of Directors, or if you are concerned that the majority shareholders and Board are oppressing your rights, please contact our experienced Houston business litigation and the Woodlands commercial litigation attorneys at Garg & Associates.  We can be reached online or at 281-210-0010.