trust and confidence

Pre-existing relationship of trust and confidence

After Ritchie v. Rupe, the fiduciary duty shareholders owe to each other only arises from a pre-existing relationship of trust and confidence.

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Shareholders' Relationship

Fiduciary Duty Based on Shareholders' Relationship

Under Texas law, a fiduciary relationship can be either "formal" or "informal." A formal fiduciary relationship arises as a matter of law in certain relationships, such as attorney-client, partnership, and trustee-beneficiary relationships. Informal fiduciary relationships arise from confidential relationships "where one person trusts in and relies upon another, whether the relation is moral social, domestic or merely personal," commonly termed "relationships of trust and confidence." In other words, a "formal" fiduciary relationship involves the imposition of fiduciary duties as a matter of law based on the legal status of the parties to the transaction; whereas an "informal" fiduciary relationship grows out of the particular facts of the case showing that the plaintiff's trust and confidence in the defendant has placed the defendant in a position of unfair advantage. In Ritchie v. Rupe, the Texas Supreme Court held that shareholders are not owed a formal fiduciary duty by their co-shareholders or by the officers and directors of their corporation; however, the Court held that informal an fiduciary duty among shareholders might still exists, and might even support a buy-out remedy, and remanded the case for determination of whether the plaintiff had proven such a relationship.

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Informal Fiduciary Duties of Shareholders

Shareholders in closely-held corporations tend to go into business with their long-time friends and family. The bond of trust that exist between the business partners is usually the reason that the parties proceed without working out all the details and planning carefully for the future with a shareholders agreement. When disputes arise, majority shareholders take advantage of their power over the corporation and the absence of agreed limitations in ways that the minority shareholder had trusted them not to do. In limited situations, Texas courts hold that these relationships of trust impose a fiduciary duty on shareholders to each other that is breached by oppressive conduct.

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Informal relationships imposing a fiduciary duty on shareholders do not exist as a matter of law but are dependent on the specific facts. Not every relationship involving a high degree of trust and confidence rises to a fiduciary relationship. Such a relationship is an extraordinary one and will not be lightly created; the mere fact that one subjectively trusts the other is never enough. The relationship of trust and confidence must exist prior to and separate from the dealings of the parties that are the subject of the lawsuit. Therefore, shareholders who go into business together as relative strangers, but then develop a relationship of trust and confidence over many years of working together, usually will not be held to owe a fiduciary duty to the other shareholders in a dispute arising out of their relationship as shareholders. The exception would be when the transaction in question, such as the purchase of one of the shareholders' stock, is clearly separate from the working together as shareholders.

Relationships that give rise to a fiduciary duty among shareholders are more easily established when the relationship is based on family ties. Husband and wife shareholders almost always owe a fiduciary duty, even with the marriage is troubled. Other family relationships also give rise to a fiduciary duty among shareholders, but only where more evidence of trust and influence is shown. The more distant the relationship, the less likely a fiduciary duty will be found. In Ritche v. Rupe, on remand, the court of appeals held that the evidence was insufficient to establish an informal fiduciary relationship, even though all the parties were part of the same family.

Nonfamilial relationships, regardless of trust and emotional ties, rarely are found to be fiduciary in nature. The evidence must show a lengthy relationship, where the parties socialized and spent time together more like a family, and multiple instances in which one party relied on the other for advice and guidance.

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Among Shareholders

Enforcing Informal Fiduciary Relationships Among Shareholders

If an informal fiduciary duty is owed by one shareholder to another, then the duty is extremely strict. Fiduciaries are held to duties of utmost good faith, loyalty, honesty, and fairness. Fiduciaries are required  to place the interests of the other before their own and not to take advantage of the trust imposed in any way. Transactions between fiduciaries are presumed unfair and may be set aside, unless the benefitting fiduciary proves that the transaction was done in good faith and with full disclosure and was otherwise entirely fair. Informal fiduciaries do not benefit from the business judgment rule. Courts may award damages to an injured fiduciary or order the profiting fiduciary to disgorge all benefits received in the transaction.