The Fiduciary Obligations of Officers and Directors
The Duties Inherent in the Corporate Business Form
When you’re planning on setting up a new business enterprise, the corporate form can be attractive. After all, it can shield your personal assets from liability for the obligations of the company. However, there are certain “fiduciary duties” that arise when you create a corporation, which govern the actions of officers or directors.
What is a Fiduciary Duty?
A fiduciary relationship is one where a person is placed in a position of trust. Because of that relationship, the person has a duty to act in the best interests of another person.
The Fiduciary Duties Associated with Corporations
Within a corporation, there are a number of duties owed:
- The duty of obedience — The officers and directors of a corporation have a legal duty to act only within the authority delegated to them by the law or by corporate documents or resolutions. Accordingly, officers and members of a company’s board of directors may not unilaterally make decisions unless they have been granted the power to do so.
- The duty of loyalty — Officers and directors are required to give priority to the needs, welfare and interests of the corporation over their own personal interests. An officer of director may not compete with the company in any way, make undisclosed profits from company business matters or engage in any activity that presents a conflict of interest.
- The duty of care — Officers and directors are expected to use reasonable care and diligence when working on behalf of the company.
- The duty of good faith and fair dealing — Officers and directors must be honest in all dealings on behalf of the corporation and must perform their duties fairly and with good faith.
- The duty of disclosure — Officers and directors must disclose all material facts related to any matter for which they seek board or shareholder approval. That includes the disclosure of any personal interests they may have in the transaction.
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