Officers and directors of corporations and managers of LLCs owe fiduciary duties to the company and, in the context of closely held businesses, often directly to the other shareholders or members. These duties — primarily the duty of care, the duty of loyalty, and the duty of good faith — set the legal standard for how those in control of a business must conduct themselves. When they breach those duties, the affected parties have legal remedies.

In closely held businesses, fiduciary duty claims take on a dimension that is largely absent in the publicly traded context. Because the same individuals who serve as officers and directors are often also the controlling shareholders, the potential for self-dealing and conflicts of interest is inherent in the structure. The absence of independent board oversight, the lack of a public market for shares, and the personal nature of the relationships involved all contribute to an environment where fiduciary breaches are both more likely to occur and more difficult to detect.

The Fiduciary Duties

Duty of Care

The duty of care requires officers and directors to act with the care that an ordinarily prudent person in a like position would exercise under similar circumstances. This means they must make informed decisions — gathering relevant information, considering alternatives, and exercising independent judgment before acting. They must also monitor the company's operations and finances and take action when problems come to their attention.

The duty of care does not require perfection. The business judgment rule protects officers and directors who make honest mistakes in judgment, as long as they acted on an informed basis and in what they genuinely believed was the company's best interest. However, gross negligence, willful disregard of the company's interests, or abdication of the decision-making function altogether can constitute a breach of the duty of care.

Duty of Loyalty

The duty of loyalty requires officers and directors to put the company's interests ahead of their own personal interests. This is the duty most commonly at issue in closely held business disputes because the potential for self-dealing is so pervasive. Specific applications of the duty of loyalty include the prohibition on self-dealing transactions, which are transactions between the officer or director and the company; the prohibition on usurping corporate opportunities, which are business opportunities that belong to the company; the obligation to disclose conflicts of interest; and the prohibition on competing with the company.

Self-dealing transactions are not automatically void, but they are subject to heightened scrutiny. A self-dealing transaction may be upheld if it was approved by disinterested directors or shareholders after full disclosure, or if it is shown to be entirely fair to the company. The burden of proving fairness typically falls on the interested officer or director, which is a significant shift from the normal presumption of the business judgment rule.

Duty of Good Faith

The duty of good faith requires officers and directors to act honestly and with a genuine intent to serve the company's best interests. A breach of the duty of good faith can be established by showing that the officer or director acted with a purpose other than advancing the company's interests, intentionally failed to act when action was required, or consciously disregarded known risks to the company. The duty of good faith is sometimes described as a component of the duty of loyalty rather than a separate duty, but the practical effect is the same: conduct that reflects bad faith or dishonest purpose is a breach of fiduciary duty.

Fiduciary Duties in the Closely Held Context

In many states, including Mississippi, courts have recognized that the fiduciary duties owed by controlling shareholders in closely held businesses extend beyond the traditional duties of officers and directors. Controlling shareholders may owe a direct fiduciary duty to minority shareholders — a duty that requires them to treat the minority fairly and not to use their control to oppress, freeze out, or otherwise harm the minority's interests.

This enhanced fiduciary duty reflects the reality that minority shareholders in closely held businesses are particularly vulnerable. They cannot sell their shares on the open market, they may have no voice in management, and they are dependent on the controlling group for any return on their investment. Recognizing a direct fiduciary duty from the majority to the minority provides a legal framework for addressing the abuses that this power imbalance makes possible.

The scope and contours of this duty vary by jurisdiction and by the specific circumstances of the case. Common issues include whether the duty applies in a particular transaction, what standard of review applies (business judgment versus entire fairness), and what remedies are available for a breach.

Common Breaches in Closely Held Businesses

The most frequent fiduciary breaches in closely held businesses involve excessive or unreasonable compensation paid to controlling shareholders who serve as officers; transactions between the company and entities owned or controlled by the officers or directors; the use of company assets, employees, or resources for personal benefit; the diversion of corporate opportunities to the officers, directors, or their related entities; the failure to distribute profits while controlling shareholders extract value through compensation and perquisites; the failure to maintain proper corporate records and governance procedures; and decisions made to benefit the controlling group at the expense of the company or the minority shareholders.

Proving these breaches requires a combination of legal knowledge and financial expertise. The attorney must be able to identify the transactions at issue, understand their economic substance, evaluate whether they were fair to the company, and quantify the harm they caused. In many cases, the most important evidence comes from the company's financial records — tax returns, bank statements, general ledgers, and internal financial reports that reveal the true economics of the challenged conduct.

The firm's experience as outside CFO for operating businesses means it approaches these cases with a working understanding of how business finances are structured, where self-dealing is likely to occur, and how to analyze the financial evidence. This is not expertise that is acquired solely through litigation — it comes from the actual experience of managing and overseeing business operations and finances.

Remedies

Remedies for breach of fiduciary duty by officers and directors include damages measured by the losses the company suffered or the profits the fiduciary gained, disgorgement of profits earned through self-dealing or usurpation of corporate opportunities, injunctive relief to prevent ongoing or threatened breaches, removal of the officer or director from their position, accounting for the fiduciary's handling of company assets, and in some cases, dissolution of the company or a court-ordered buyout of the minority shareholder's interest.

The appropriate remedy depends on the nature of the breach, the extent of the harm, and the practical realities of the situation. In many closely held business disputes, the ultimate resolution involves a buyout or restructuring of the ownership, because the breakdown in the relationship between the shareholders makes it impractical for them to continue doing business together.

If you have questions about fiduciary duty issues involving officers, directors, or controlling shareholders of a closely held business, the inquiry form is the best place to start.