Introduction
The word “fiduciary” comes from the Latin word “fiducia”, which means “trust”. The term “fiduciary” is most often used to refer to a person or business that has the power and obligation to act on behalf of another person (called the beneficiary) against the background of total trust, honesty and good faith. Fiduciary duties of directors, officers and controlling shareholders play significant role in business and corporate governance, along with other duties, imposed on them by position. For the purposes of this assignment I would like to discuss fiduciary duties of directors, officers and controlling shareholders. The legislation of Ohio will be considered.
In Ohio the relationship between the officers and directors and their corporation are almost fully based on trust and, therefore, may be considered fiduciary relationships. The scope of director’s fiduciary duty and the duty of care are constituted by Ohio Revised Code Sections 1701.59 and 1701.60. According to Ohio Revised Code Sections 1701.59 and 1701.60, the duties a director owes to the company and shareholders include the duties of loyalty, care, fair dealing and disclosure (Ohio Revised Code, 2013, 1701.59-1701.60). While a director shall consider the interests of shareholders on a mandatory basis, he may also take into account the ones of corporation’s creditor, but a director can himself decide, whether these interests will be considered.
In the doctrine of the common law the duty of loyalty is most often viewed as faithfulness to the duty, and is considered to contain such duties as the duty to act for proper corporate purposes, to adequately consider the matters for decisions, to keep the discretion unfettered, as well as to act in a good faith (Coghill, Sampford and Smith, 2013, p.70). The duty of care is considered to contain the duties of reasonable investigation and reliance. As opposed to the doctrine, Ohio Revised Code considers the duty of good faith not to be a part of the duty of care, but a separate duty a director owes to a company. Ohio Revised Code Section 1701.59 requires that a director of a corporation acts “in good faith, in a manner the director reasonably believes to be in or not opposed to the best interests of the corporation, and with the care that an ordinarily prudent person in a like position would use under similar circumstances” (Ohio Revised Code, 2013, 1701.59).
This provision can be considered to be a liability test due to the fact that the director, who performed his duties in accordance with this standard, shall have no liability imposed with regard to his or her position as director of a corporation. Evaluation of director’s complying with this duty is concerned with the court’s applying “business judgment rule”. In common law systems the term “business judgment rule” refers to a judicially created rule, which allows considering the way corporate decisions are made under broad discretion. The peculiarity of the rule lies in taking into account the fact that most of business decisions are made under uncertainty circumstances.
In Ohio stating the claim for breach of fiduciary duty by a corporation’s director requires allegations regarding the existence of a duty of an alleged wrongdoer, the fact that the duty was breached, as well the injury, which should directly result from the breach. Proving the breach of duties requires clear and convincing evidence, demonstrating that the director failed to act in a good faith or in a manner, responsive to the best interests of the corporation.Unlike the fiduciary duties, owed by directors to corporations, fiduciary duties of corporate officers have not been codified in Ohio legislation. However, according to the doctrine of corporate law in Ohio, corporate officers may be found personally liable for acts of a corporation, if they specifically directed the act, took part in it or took part in its commission (Coghill, Sampford and Smith, 2013, p.83).
While directors and corporate officers owe fiduciary duties to shareholders of a corporation, majority (or controlling shareholders) have a fiduciary duty to minority shareholders. This rule was specified in Crosby v. Beam (1989). The court held that majority shareholders’ fiduciary duty to minority shareholders lies in the fact that majority shareholders are obliged not to misuse their powers by fostering their own interests at the expense of the interests of a corporation. The court also observed that majority (controlling) shareholders conduct the breach of their fiduciary duty, when they utilize control of the corporation in order to prevent minority shareholders from having equal chances to participate in corporation-related decision-making (Crosby v. Beam, 1989).
Another restriction on majority shareholders was imposed by Morad v Task (1994). In this case the court stated that neither an officer, nor a shareholder of the accompany is allowed to enter into a new business, if minority shareholders consider it to be competing with the one of the corporation (Morad v Task, 1994). Specific restrictions also relate to the termination of shareholders’ employment and the right of minority shareholders to question the compensation, which was paid to the majority shareholder. The issue of majority shareholders’ fiduciary duty, owed by them to minority shareholders, was further elaborated on in Smith v. N.C. Motor Speedway, Inc.(1997).In this case the court decided that any shareholders (including majority shareholders) do not owe fiduciary duties to all other shareholders when they sell their own stock in the corporation. The court acknowledged shareholders’ having the right to control their shares and vote in their own interests. Despite stating that these interests may be limited by fiduciary duties majority shareholders owe to other shareholders, the decision of the court does not specify the duties, which can be considered in this regard.
While acknowledging the fact that the shareholders’ motives may be for personal profit or determined by any kind of caprice, the court gives them the right to exist, as long as they do not violate any duty, owed to other shareholders. Such a vision of the court is determined by the right of an owner of corporate stock to dispose of his shares as an element of the rights, constituting the concept of ownership in common law. In Smith v. N.C. Motor Speedway, Inc. (1997) the court underlined that in selling their corporate stock owners should necessarily act for themselves and not as other stockholders’ trustees.
After having considered fiduciary duties of directors, corporate officers and majority shareholders in Ohio corporate law system, I may conclude that these duties are included both into codified legislation and case law in order to protect the interests of corporations as legal entities and create the balance between the rights of some of business relations’ participants and interests of the other. In corporate law fiduciary duties are often considered to reflect hidden rights of less legally protected persons.
References
Coghill, K., Sampford, Ch., Smith, T. (2013). Fiduciary duty and atmospheric trust. Burlington: Ashgate Publishing
Crosby v. Beam. (1989). 47 Ohio St. 3d 105. Retrieved 10 January 2013 from http://www.leagle.com/decision/198915247OhioSt3d105_1131
Moard v Task. (1994). WL 78157.
Ohio Revised Code (2013). Retrieved 10 January 2013 from http://codes.ohio.gov/orc/
Smith v. N.C. Motor Speedway, Inc. (1997). Retrieved 10 January 2013 from http://www.ncbusinesscourt.net/opinions/1997%20NCBC%205.htm
The Supreme Court of Ohio (2013). Supreme Court of Ohio Case Summaries. Retrieved 10 January 2013 from https://www.sconet.state.oh.us/PIO/summaries
