What business partners need to know about fiduciary duty
The litigation team at Wegman Hessler recently won a case for a small business client, who received a substantial judgment. The individual was a 49% shareholder owner of an LLC and was “squeezed out” of their business by the 51% owner following a disagreement. At the bench trial before a judge, the court determined that the majority shareholder had wrongfully ended our client’s employment without cause. He had wrongfully excluded him from the business. They also found that the actions are in breach of the majority shareholder’s “fiduciary duty.”
(Business partners, take note.)
Fiduciary duty refers to a person who, in their professional role, has a legal obligation to act in the best interests of those they represent. This concept is most often associated with professionals, like attorneys and financial advisors. It also applies to business owners and majority shareholders.
The majority shareholder in a closely held business (such as an LLC) has a fiduciary duty to those who own a lesser percentage of the company. That means if you own the majority of a business with other part owners (i.e., partners), you must keep their best interests in mind – not just your own – when making decisions.
Most of the time this is easy. But when you want to take steps to get rid of someone on your leadership team who also happens to be a shareholder, there can be legal consequences. This recent judgment is an example.
When making such decisions – especially when deciding to end another partner’s interest / involvement in your organization – it’s a good idea to seek the advice of experienced legal counsel. A business law attorney can help you understand your rights and obligations, so you can feel confident in making an informed business decision that minimizes the risk of liability.
Questions to consider
- Is your business legally structured in such a way that fiduciary duty comes into play?
- Are your corporate records updated?
- Do you have legal documentation in place to protect and defend your business when partnership matters come up?
- As a partner and owner, do you fully understand the related legal obligations of your role and responsibilities?
If you’re not sure about any of the above questions, let’s have a conversation. We’re here to help.
Wegman Hessler specializes in business law for business leaders, applying legal discipline to solve business problems to help business owners run smarter. For more than 50 years, this Cleveland business law firm provides full-service strategic legal counsel for closely held businesses. Learn more at www.wegmanlaw.com.