Breaches of Fiduciary Duties in Closely Held Companies
Posted on June 6, 2023 by Julie Pendleton
In Washington State, closely held companies are those in which the ownership is concentrated among a small number of shareholders. These companies may also be family-owned or held by a group of individuals who have a relationship with one another beyond just being co-owners. While these companies may have a different dynamic than public corporations, they are still subject to the same fiduciary duties.
Closely held companies can take a variety of forms (such as corporations, limited liability companies, and professional service corporations). Regardless of the form, the law imposes fiduciary duties on owners, officers, and directors of closely held companies. See generally RCW 23B.08.735, RCW 25.15.038, and RCW 25.05.165.
Fiduciary Duties in Closely Held Companies:
Shareholders, directors, and officers in a closely held company owe a fiduciary duty to each other and to the company. More specifically, each has a duty to act in good faith and in the best interests of the company and its shareholders.
Examples of Breaches of Fiduciary Duties:
Closely held companies have unique dynamics that can give rise to fiduciary duty issues. There are many ways in which a breach of fiduciary duties can occur by owners, officers, and/or directors of a closely held company. Following are some examples:
- Diversion of company assets for personal use;
- Self-dealing, such as using the company to benefit oneself at the expense of other owners;
- Failure to disclose material information to other owners or the company;
- Voting to approve transactions that are not in the best interests of the company or its owners;
- Excessive compensation or perks for owners, officers, or directors at the expense of the company and its owners; and/or
- Ejecting an owner for an improper reason (i.e., retaliating against one business owner for instituting divorce proceedings against another owner of the business).
Remedies for a Breach of Fiduciary Duties in Closely Held Companies:
The remedies for a breach of fiduciary duty in a closely held company may include damages, injunctive relief, and/or the appointment of a receiver or custodian to oversee the affairs of the company. The court may also order the dissolution of the company if it is found to be in the best interests of the shareholders.
In some cases, the owners of a closely held company may have a shareholders/operating agreement that outlines the rights and obligations of the shareholders and members. These agreements can provide additional remedies and protections for shareholders/members who have been harmed by a breach of fiduciary duties.
Conclusion:
It is important for owners, officers, and directors of closely held companies to understand their respective fiduciary duties and to ensure they act in compliance with those duties. They should also take steps to address any conflicts of interest (potential or actual) and to disclose material information to other owners.
If you suspect a breach of fiduciary duties has occurred and wish to take action, it is important to consult with an experienced attorney who can help evaluate your options and enforce your rights. The business litigation team at Lasher Holzapfel Sperry & Ebberson PLLC is experienced in representing shareholders, owners, and companies, including minority interest holders, with addressing and litigating breaches in fiduciary duties and others issues involving closely held companies.
