Are there still fiduciary duties in a family owned or “closely held” business in Nebraska? Are they different or relaxed because the stockholders all happen to be related to management?
The answer is yes, there are fiduciary obligations, and no, they are not different or relaxed. The law does not distinguish between fiduciary duties applicable to a family owned business and fiduciary responsibilities applicable to any other business. But there are a range of ways to form your family owned business to provide for the level of fiduciary duties appropriate for your needs. What are these fiduciary duties and how do they apply in Nebraska? The following is only a quick summary.
Who owes fiduciary duties?
Fiduciary responsibilities are imposed by Nebraska law. Trustees can owe fiduciary duties to the beneficiaries of their trusts. Guardians can owe fiduciary duties to their charges – legally known as “wards.” But in the business context, the persons responsible for running and managing a business owe fiduciary duties.
Corporate Fiduciary Duties
In a corporation, this means the directors and corporate officers. It not necessarily include every junior, associate, back-up, assistant vice-president in charge of some task. Courts have not been particularly clear where to draw the line. At a minimum, it is safe to include any officer named in a company’s formation and governance documents. But how far down the chain of command a court will impose fiduciary duties is still unclear.
LLC Fiduciary Duties
In a limited liability company, managers and officers are subject to the same fiduciary duties as directors and officers of corporations, unless the members of the LLC elect to waive these duties in writing. This can be an enormous advantage of an LLC. The shareholders of a corporation cannot waive their rights to fiduciary duties from the directors and officers.
What are fiduciary duties?
Generally speaking, fiduciary duties in the business world are duties owed by the directors, officers, and managers of businesses to the shareholders of the business. Fiduciary duties go beyond basic duties to deal fairly and in good faith with others in a business setting. The basic fiduciary duty imposed on directors and management generally break down into two categories: the duty of care and the duty of loyalty.
The duty of care requires that a director, officer or other individual perform his or her duties on behalf of the company and its equity holders with a level of care, including reasonable inquiry where appropriate, that an ordinarily prudent person in a similar office would use under similar circumstances. This does not mean, however, that such a person cannot take business risks – even significant risks. What it means is that, when considering whether or not to take such risks, the person thinks through and considers the situation with the same level of care that an ordinarily prudent officer or director might when facing the same situation. A person’s conclusion after consideration could be completely novel or outrageous – but if he or she has thoughtfully considered the factors and made inquiries where appropriate, he or she will have generally fulfilled the duty of care.
The duty of loyalty requires a direct, officer or other individual subject to the duty to act in good faith in the best interests of the business and its equity holders, and not for their own interest. Just as with the fiduciary duty of care, courts will generally give great latitude to business leaders in presuming they are complying with their fiduciary duty of loyalty. This presumption is known as the business judgment rule. When a court applies the business judgment rule, it is saying that it sees nothing to suggest this presumption is incorrect or inapplicable and therefore defers to a business leader as he or she applies his or her business judgment.
In certain situations, however, a court will not be so deferential. The most common is when there is a conflict of interest between the director or officer and the shareholders. For example, when a director or officer is negotiating an agreement with the company, a court will not generally presume that the director or officer is acting in the best interests of everyone else. In these sorts of situations, a court will apply a heightened standard of scrutiny in determining whether or not the fiduciary duties were met and the individual may have the burden of proving the entire agreement or transaction that resulted was fair to the company.
Please be aware that this is only a summary, but remember that a family owned business is subject to all the same rules as any other business. If you own a business or are contemplating starting a new business, you should consult with an experienced Nebraska business law attorney to make sure you comply with the applicable fiduciary obligations. Contact Thompson Law Office at 402-934-0198 or toll-free 1-888-934-0198. You can also schedule a consultation with a business lawyer online now. Fiduciary duties should be taken seriously.