Missouri Business Fiduciary Duties
A Missouri business fiduciary is a person entrusted to manage a business’s affairs. Such fiduciaries are typically an owner, manager, general partner, or officer of the business. In Missouri, that person has a duty to act in good faith and in the best interest of the business. Generally, that means that a business fiduciary of a Missouri LLC or partnership must act with the same care that a corporate officer would exercise under similar circumstances.
Good Faith
Good faith is generally defined as a “state of mind” consisting of honesty, faithfulness, fair dealing, and the absence of an intent to “defraud or to seek an unconscionable advantage.” A fiduciary of a Missouri LLC, for example, generally acts in good faith when the fiduciary honestly believes that his or her actions are permitted or required by the terms of the operating agreement. Good faith might also exist when the Missouri business fiduciary relies on the advice of others in making decisions on behalf of the LLC.
For example, LLC members and managers can generally rely on information provided to them by employees of the LLC, so long as those members or managers generally believe that the employees competently compiled the information. Likewise, a Missouri business fiduciary may generally rely on the opinions and information provided by professional service providers retained by the business, like attorneys and accountants. But a Missouri business fiduciary does not act in good faith when he or she relies on information or opinions from others that the fiduciary knows, or should know, are incorrect or that might be unreliable. As such, a Missouri business fiduciary must assess the reliability of the information given to the fiduciary by others, and the fiduciary cannot hide behind information he or she knows, or should know, is potentially flawed.
Business Judgment Rule
Fiduciaries must frequently make various types of decisions about the business. Although each decision must be made in good faith and in the best interest of the business, that does not mean that a Missouri business fiduciary is always liable when his or her judgment turns out to be wrong or is even harmful to the business. Missouri’s so-called business judgment rule generally protects fiduciaries from liability for actions within their scope of authority, if those actions are made in good faith and uninfluenced by anything other than an honest belief that the action is in the best interest of the business. But the business judgment rule does not protect a Missouri business fiduciary from liability for “fraud, illegal conduct…or an irrational business judgment.”
Who Can Sue?
Shareholders, limited partners, non-managing members, and other passive investors usually lack the authority to manage the business. Therefore, when someone in charge of the business misallocates the property or money of the business or fails to pursue or protect an interest of the business, then others in charge might have to file a lawsuit to recover the business’ property, money, or interest. But the passive investor faces a dilemma when no one in charge of the business will take action to recover misallocated property or money or to protect an interest of the business. Clearly the investor has been harmed, but typically only indirectly. The direct harm is to the business because it owns the misallocated property or money, not the investors. When an investor transfers money or property to a business, that money or property then belongs solely to the business. And any profit or gain made from the invested funds or property, and any property acquired with the investment, likewise belong solely to the business. Only when the money or property of the business is distributed to the investor, say as a dividend distribution, does it then belong to the investor. Because owners are not usually harmed directly when company or property is misallocated, they do not have standing to directly sue the person in charge who misallocated the money or property of the business. But they might have standing to sue the bad actors derivatively on behalf of the business.
Derivative Actions
Missouri Rule 52.09, state statutes, and Missouri case law govern derivative actions. Depending on how the business is organized, the applicable laws on derivative actions might require the passive investor, prior to filing a derivative action, to at least demand that those in charge take action to recover the misallocated money or property or to protect an interest of the business. Only if the others in charge ignore the request can the passive investor then file a derivative action.
This article is for general informational purposes only. It is not intended as legal advice.
Sewell Law represents clients in business and real estate matters and in civil litigation. Please contact Michael Sewell at (314) 942-3232 or at michael@sewelllaw.net to discuss your legal matters.
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