Legal Updates

Sometimes a shareholder may owe fiduciary duties to the shareholders and not just to the company

August 16, 2021

A company officer breached fiduciary duties by entering agreements with a potential investor who promised the officer significant benefit which the officer did not disclose to company shareholders, while exploiting his position in the company to sabotage negotiations with another investor.

The Court held that although the officer breached his fiduciary duty, the shareholders are not entitled to compensation. An officer of a company owes fiduciary duty to the company but given a special relationship between an officer and company shareholders, and subject to the benefit of the company, an officer may have a fiduciary duty towards company shareholders, particularly when the officer advises shareholders; shareholders’ property rights are at stake and the company is a small and private one. Although breach of such fiduciary duty does not require the existence of damage, in order to obtain financial relief, both damage and a causal connection between the breach of the fiduciary duty and the damage are required. Here, although the officer breached his fiduciary duty towards the shareholders whose property rights were at stake and the officer had the power to effect such rights, while concealing the benefits he was promised by the other investor, the very engagement with the other potential investor did not cause damage to company shareholders and even benefited the company more than the other transaction. Thus, the shareholders are not entitled to monetary compensation.