The term “fiduciary duty” is used to describe a legal relationship between two parties where one party owes a duty of care to the other and is entrusted to act in the best interest of the other. This term is most commonly associated with estate fiduciaries, such as personal representatives or trustees, who have the authority to act on behalf of an estate or its beneficiaries. However, many business owners may be surprised to learn that they too have a fiduciary relationship, which may interfere with their ability to maximize the benefits they receive as a result of their ownership interest in the business.

In 2016, the Pennsylvania legislature adopted the Pennsylvania Uniform Limited Liability Company Act of 2016 (“Act”), which is the second iteration of statutory authority with respect to Pennsylvania limited liability companies (“LLC”).  The Act provides additional guidance that was lacking in its predecessor, including the duty owed by members and managers of an LLC. The Act now expressly provides that a member in a member-managed LLC and a manager in a manager-managed LLC owe a duty of loyalty and care to the company[1]. The Act specifically describes what is included within the scope of a duty of loyalty and duty of care and provides that such duties of a member or manager are met if the actions taken are in good faith and are considered fair dealing.

Corporate fiduciary duties, on the other hand, are well-established and discussed extensively in case law, with majority shareholders having a common law fiduciary duty to a corporation’s minority shareholders. While majority shareholders may consider what is in their best interest when making decisions on behalf of the corporation, they cannot use their status as majority shareholders to exclude minority shareholders from their proper share of benefits under the corporation’s enterprise.

Whether it is within the context of an LLC or a corporation, a party’s failure to uphold his or her fiduciary duty provides a basis for legal action against the offending party. A well-drafted Operating Agreement or Shareholders’ Agreement may delineate what actions can be taken by a shareholder, member, or manager that is not in violation of his or her duty or provide for certain remedies in the event such duty is violated, which can potentially avoid the costly and uncertain process of litigation. For example, an Operating Agreement or Shareholders’ Agreement may allow a shareholder, member or manager to participate in other endeavors or ventures outside of the LLC or corporation that is considered competitive in nature. Or, an Operating Agreement or Shareholders’ Agreement may provide that in the event a duty is violated as a result of a shareholder’s, member’s or manager’s bad act, the bad actor is required to redeem his or her interest in the LLC or corporation for a fraction of its fair market value. An Operating Agreement under the current Act may now also limit a member’s exposure to damages in the event he or she violates his or her fiduciary duty. The Act in 15 Pa.C.S.A. §8849.1(j) expressly allows the Operating Agreement of a member-managed LLC to provide that a member is not personally liable for monetary damages in the event the member breaches his or her fiduciary duty to the LLC or to the other members.

If your client would like to better understand his or her obligations to fellow owners and/or to the company, or is concerned that another owner is in violation of his or her fiduciary duty, please do not hesitate to have the client reach out to the attorneys of Maiello, Brungo and Maiello to further discuss the matter.

[1] However, in a manager-managed limited liability company, the members do not owe the company or the other members a fiduciary duty.

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