Part 2: Fiduciary Duties to Shareholders, Partners, and Members
12 What is a “fiduciary duty”?
At times, the law imposes a special relationship on two parties. These parties, like a board of directors to shareholders or partners to a partnership, owe each other a special duty of loyalty and care. We call this a “fiduciary duty.”
It may be easiest to understand this duty by considering the role of a “beneficiary”, “trustee”, and “trust.” A trust occurs when assets are held by one person (the trustee) for the benefit of another (the beneficiary). For instance, a young child may inherit substantial assets which a trustee manages on their behalf until they reach the age of majority. If the trustee who manages the assets begins to use those assets for their own personal benefit (other than a reasonable management fee), the beneficiary of the trust could certainly sue them. After all, the assets are not owned by the trustee and the trustee violated the duty of loyalty. Or, if the trustee is unreasonably careless in managing assets and they lose their value, such as by failing to diversify a portfolio of stocks, again the beneficiary of the trust could sue the trustee, for failing to manage the property of the trust with reasonable care.
A federal law for employee retirement accounts puts this standard very well:
[A] fiduciary shall discharge [their] duties with respect to a [retirement] plan solely in the interest of the . . . beneficiaries and–
(A) for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries; and
(ii) defraying reasonable expenses of administering the plan;
(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent [person] acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims . . . .[1]
Or, in the famous case of Meinhard v. Salmon, in which a partner of 20 years took advantage of a business deal without notifying the other, the court noted this: “A trustee is held to something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior… the level of conduct for fiduciaries [has] been kept at a level higher than that trodden by the crowd.”
Parties who owe fiduciary duties (not a complete list, and the particulars may vary):
| Owes Fiduciary Duties | Owes Duties to Whom |
| Corporate boards | Shareholders |
| Partners in a general partnership | Other partners, the partnership itself |
| Managers of an LLC | LLC members, and the LLC itself |
| Agents | Principals |
| Trustees | Trust beneficiaries |
| Employees | Employers |
| Attorneys | Clients |
| General partners in a limited partnership | Other general and limited partners, the partnership itself |
| Spouse, as to community (jointly-held) property | The other spouse |
Parties who do not owe fiduciary duties:
| Does Not Owe Fiduciary Duties | Duties Not Owed |
| Employers | Employees |
| Shareholders | Corporations |
| Limited partners in a limited partnership | The general partners of the limited partnership |
| Principals | Agents |
| Producers of products | Consumers of those products[2] |
Exercises
- Read the facts of Meinhard v. Salmon through the link above. Why would it make sense for the law to impose a duty of loyalty and care in this instance? Why not?
- 29 U.S.C. § 1104 (emphasis added). ↵
- We might, and likely should, say that producers owe ethical duties to their consumers, but we would not characterize these as fiduciary duties. Why not? Because fiduciary duties are more than arms-length contract duties or "don't injure another" duties in tort. Thus, for instance, it is perfectly legal to charge a consumer a price that is more than they would like to pay for a product, which may be beneficial to the company but not in the interests of the individual consumer. If the company owed a fiduciary duty to consumers it would need to charge the best price for the consumer (likely something like the lowest price that still keeps the company operating), not the best price for the company's profit. ↵
