Many business owners are unaware of their legal obligations regarding corporate governance and the fiduciary duties and fiduciary obligations of majority shareholders.
Washington state law is explicit, defining both owner obligations and the steps corporations must take in order to protect the interests of minority shareholders.
It’s absolutely critical that limited liability companies (LLC) follow both the letter and the spirit of the law in order to ensure they remain in compliance.
At Horenstein Law Group, a portion of our practice is dedicated to helping family-run LLCs stay informed of the law and on top of their fiduciary duties and obligations.
Contact Horenstein Law Group today with any questions.
Fiduciary Duties and Fiduciary Obligations
There are several ways in which an LLC can fun afoul of its fiduciary duties and obligations.
Often known as corporate malfeasance, they can include:
Violations of shareholder agreements
Not following corporate formalities
Officer or board member violations
Using corporate funds for personal gain
Failure to get approvals (company actions)
There are two main fiduciary duties: the “Duty of Care” and the “Duty of Loyalty.” The Legal Information Institute at the Cornell Law School breaks them down as follows:
The Duty of Care requires that owners inform themselves “prior to making a business decision, of all material information reasonably available to them.”
The Duty of Loyalty means that owners are not permitted to use their position of trust and confidence to further their private interest."
The other fiduciary duties include the duties of good faith, confidentiality, prudence, and disclosure — the last of which requires directors to act with “complete candor.”
State law further requires (RCW 23B.12.020) that all shareholders who are entitled to vote must approve a sale of corporate property and assets other than in the usual and regular course of business.
Fiduciary Duties of Shareholders in Closely Held Corporation
Closely held corporations are those in which shares are held by a limited number of shareholders and in which there is typically no market to trade those shares.
State law is generally interpreted by the courts to mean that there is a fiduciary duty on majority shareholders to disclose to minority shareholders material facts of a purchase or sale of company assets. (In other words, majority shareholders are obligated to deal with minority shareholders in good faith and honesty. Please see “General Standards for Directors” below.)
Under RCW 23B.13.020 of the Washington Business Corporation Act, shareholders can “dissent from, and obtain payment of the fair value of the shareholder's shares in the event of, any of the following corporate actions,” including:
A plan of merger
A plan of share exchange
A sale, lease, or exchange
An amendment of the articles of incorporation
If a corporate action violates the corporation’s articles of incorporation
If a corporate action fails to follow procedural requirements
If a corporate action is fraudulent
General Standards for Directors
The attorneys at Horenstein Law Group recommend all businesses and family-run LLCs to familiarize themselves with the dictates of RCW 23B.08.300, which states that directors shall discharge their duties carefully, “in good faith,” and “(i)n a manner the director reasonably believes to be in the best interests of the corporation.”
Horenstein Law Group’s attorneys practice law in commercial real estate, business, land use, and governmental affairs. We’re happy to discuss fiduciary duties and obligations with you so that you can gain a better understanding of the law as it applies to your business interests.