Fiduciary duties in Michigan apply to directors, officers, managers or “those in control” of closely held businesses and include duties of: 1. Care, 2. Loyalty, 3. Good faith and 4. Disclosure. In Michigan, these duties are based in common law (case law) but have now been codified (become statutory law as enacted by the legislature) in Michigan’s Business Corporation Act and Michigan’s Limited Liability Company Act. A fiduciary relationship is one where a person is under a duty to act for the benefit of another on matters where: 1. One puts faith and trust in another, 2. One assumes control and/or responsibility over another, 3. One acts for or advises another on matters related to the relationship and 4. One traditionally recognized as involving fiduciary duties such as the attorney client relationship. Likewise, fiduciary relationships can be created informally or even unintentionally.
The Fiduciary Duties
1. Duty of Care
The duty of care requires that the fiduciary act as and make decisions as a reasonably prudent person would under similar circumstances. Put another way, if the decision is made in such a manner as would be made by a person making a decision for his own interests and the decision was ostensibly reasonable then the standard has been met and no breach of duty of care would have occurred.
2. Duty of Loyalty
The duty of loyalty compels that the fiduciary be loyal to the interests of those to whom the duty is owed – putting their interests ahead of his own. In the closely held business, this duty of loyalty is usually implicated when some form of self-dealing occurs whereby the fiduciary takes a personal benefit not shared with the company itself or the other shareholders.
3. Duty of Good Faith
The duty of good faith is usually couched in the negative; i.e. if bad faith is shown in the context of an action taken or decision made then, typically, a breach of the duty of good faith can be established.
4. Duty of Disclosure
The duty of disclosure requires that the fiduciary disclose to the corporation and the shareholders all information that is known to be relevant to the goings on of the corporation and that would be important for the other shareholders to be aware of.
The relatively obvious answer to this question is that if the fiduciary duties are ignored a breach of a duty may occur. Such a breach may cause, at best, corporate mistrust and discontent and, at worst, difficult and expensive litigation. Claims may be brought on behalf of the corporation (a derivative claim) for harm caused to the corporation and by extension the shareholders or the claim may be brought directly by “oppressed” shareholders (or LLC members). Typically, the claims would allege that certain conduct of those in control of the corporation was illegal, fraudulent or willfully unfair and oppressive to the shareholder, the member [or the corporation]. Again, these duties and legal remedies apply to both corporations and limited liability companies alike.
Those in positions, and with duties, that compel fiduciary duties owed to others must be mindful of their responsibilities and be loyal and honest and act with care and in good faith to those whose trust and faith they have been charged with. Although there is substantial protection under the “business judgment rule” for those making important business decisions on behalf of the company, those actions cannot be taken with impunity. Failure to recognize this fact can and does result in shareholder or member actions directly against those fiduciaries both on their own behalf and on behalf of the entity which also suffered the harm. The best way to avoid these style, and potentially company ending, litigation matters is to fully understand and honor the obligations the law imposes. Failure to do so makes the “so what” a long and expensive story no business owner wants to have to tell.