When a Business Partner Acts Against the Company: Understanding Breach of Fiduciary Duty

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Running a business with a partner requires trust. Owners often share access to company finances, confidential information, customers, employees, and business opportunities. But what happens when one owner begins using that position for personal gain?

A business partner may start directing company opportunities to another business, using company funds for personal expenses, withholding important financial information, or making decisions that benefit themselves at the expense of the company.

When conduct crosses the line from a business disagreement into legally actionable misconduct, the issue may involve a breach of fiduciary duty.

Understanding what fiduciary duties are, how they can be violated, and what business owners can do when a dispute arises is an important part of protecting a company and its owners.

What Is a Fiduciary Duty?

A fiduciary duty is a legal obligation that can require certain individuals to act in the interests of another person or entity rather than using their position for improper personal benefit.

In a business setting, fiduciary duties can arise in relationships involving:

• Business partners

• Corporate directors

• Officers

• Controlling shareholders

• LLC members or managers

• Other individuals with significant authority over a business

The exact duties depend on the type of business entity, the governing documents, and the applicable state law.

For example, Illinois corporate law places limitations on provisions that attempt to eliminate a director's liability for certain breaches of fiduciary duty, including breaches involving loyalty, intentional misconduct, knowing violations of law, or improper personal benefits.

Because fiduciary-duty law can vary depending on the circumstances, business owners should not assume that every dispute between partners automatically constitutes a fiduciary-duty claim.

What Can a Breach of fiduciary Duty Look Like?

Fiduciary-duty disputes can arise in many different ways.

Diverting Business Opportunities

Imagine that a company has spent years developing relationships with a valuable customer. A business owner secretly creates another company and begins directing that customer's profitable contracts to the new company.

Depending on the circumstances and applicable law, diverting a business opportunity that properly belongs to the company may create serious legal issues.

Using Company Money for Personal Expenses

Business owners generally have access to company funds for legitimate business purposes.

Problems can arise when an owner uses company money to pay personal expenses, transfers money to another entity they control, or otherwise misuse company assets.

The question is not simply whether money changes hands. The surrounding circumstances, authorization, company agreements, and applicable law all matter.

Self-Dealing

a conflict can arise when an owner or manager uses their position to benefit themselves or a related person.

Examples might include:

• Awarding contracts to a company they personally own

• Paying themselves unreasonable compensation

• Selling company property to themselves for less than its value

• Entering transactions with family members without appropriate disclosure

Transactions involving potential conflicts of interest should be carefully reviewed rather than automatically assumed to be unlawful.

Misusing Confidential Information

A business may posess valuable information about:

• Customers

• Pricing

• Vendors

• Marketing Strategies

• Trade secrets

• Financial information

Using confidential company information for personal benefit or to compete against the company can create significant legal concerns.

A Business Disagreement Is Not Always a Fiduciary-Duty Claim

Not every disagreement between business owners is a lawsuit.

Partners can legitimately disagree about:

• Hiring employees

• Expanding the company

• Taking on debt

• Marketing strategies

• Compensation

• Business expenses

• Whether to sell the company

A disagreement becomes more legally significant when the conduct potentially violates a contractual obligation, fiduciary duty, corporate law, operating agreement, partnership agreement, or another applicable legal requirement.

The distinction matters because pursuing litigation without a clear legal basis can be expensive and may make an already difficult business relationship worse.

What If One Owner Is Being Frozen Out?

Another common problem occurs when one owner suddenly loses access to the business.

For example, a minority owner occurs when one owner suddenly loses access to the business.

For example, a minority owner may discover that:

• They are no longer receiving financial information.

• Their access to company records has been restricted.

• Company profits are being redirected.

• The controlling owners are making decisions without them.

• Their role in the company has effectively been eliminated.

Depending on the entity and applicable state law, these circumstances may raise issues involving shareholder rights, fiduciary duties, contractual rights, oppression, or other business-law claims.

Missouri law, for example, provides specific statutory remedies for shareholders of certain statutory close corporations when those in control engage in conduct that is illegal, oppressive, fraudulent, or unfairly prejudicial, or when management deadlock creates serious problem for the company.

What Should You Do If You Suspect Misconduct?

If you believe another owner or manager is acting improperly, reacting immediately with threats or accusations may not be the best first step.

Instead, consider taking practical steps to preserve information and understand your position.

Review Your Business Documents

Start by locating documents such as:

• Operating agreements

• Partnership agreements

• Shareholder agreements

• Articles of incorporation

• Corporate bylaws

• Employment agreements

• Buy-sell agreements

• Previous amendments

• Board or member resolutions

These documents may contain provisions governing decision-making, ownership rights, transfers, disputes, and the responsibilities of the owners.

Missouri law expressly permits shareholders of certain statutory close corporations to enter written agreements governing corporate powers, management, and relationships among shareholders.

Preserve Relevant Records

Keep copies of documents and communications that may be relevant to the dispute.

Depending on the situation, this could include:

• Financial statements

• Bank records

• Emails

• Text messages

• Contracts

• Invoices

• Accounting records

• Meeting minutes

• Ownership records

• Customer communications

Do not alter, destroy, or improperly obtain company information. An attorney can help you determine what records you are legally entitled to access and how they should be preserved.

Avoid Escalating the Situation

Business disputes can become emotional, especially when longtime partners or friend are involved.

Before confronting the other owner, consider speaking with a business litigation attorney. A lawyer can help you understand whether the conduct potentially violates a legal duty and what options may be available.

Can a Business Sue an Owner?

Sometimes.

An important question in business litigation is who actually suffered the legal injury.

For example, if an owner allegedly caused financial harm to the company, the claim may belong to the business rather than the individual shareholder or member.

The distinction can affect:

• Who has standing to sue

• What type of lawsuit may be appropriate

• What procedural requirements apply

• Who may ultimately receive a recovery

Derivative litigation is one mechanism that can arise when a claim belongs to the company but an owner seeks to pursue it on the company's behalf.

Because these issues can be highly technical, determining the proper plaintiff before filing a lawsuit is critical.

What Remedies May Be Available?

The appropriate remedy depends heavily on the facts and applicable law.

Potential remedies may include:

• Monetary damages

• An accounting

• Injunctive relief

• Recovery of improperly transferred assets

• Disgorgement of improper profits

• Enforcement of contractual rights

• Changes in management or control

• Buyout or other ownership-related remedies

• Judicial dissolution in appropriate circumstances

Not every remedy is available in every case.

For example, Missouri's statutory close-corporation provisions allow courts to consider specific forms of relief when statutory requirements are satisfied.

Litigation Isn't Always the First Solution

Business litigation can be expensive and disruptive.

In some circumstances, negotiation or another form of dispute resolution may provide a better solution.

Depending on the dispute, the parties may be able to negotiate:

• A buyout

• A restructuring of ownership

• Changes in management responsibilities

• A settlement

• A new operating agreement

• Restrictions on certain transactions

• A structured business separation

However, settlement discussions should not prevent a business owner from taking steps necessary to preserve evidence or protect legal rights.

When Should You Contact a Business Litigation Attorney?

Consider speaking with an attorney when you discover conduct such as:

• Company funds being used improperly

• Business opportunities being diverted

• Financial records being withheld

• An owner secretly competing with the company

• A partner entering undisclosed related-party transactions

• Company assets being transferred without authorization

• A co-owner attempting to remove you from the business

• A serious dispute over ownership or control

• A management deadlock that is preventing the company from operating

Early legal advice can sometimes help resolve a dispute before it becomes a full-scale lawsuit.

It can also help preserve important evidence and prevent avoidable mistakes.

Frequently Asked Questions

Can a business partner be sued for putting their own interests ahead of the company?

Potentially. Whether a lawsuit is available depends on the person's role, the business structure, governing documents, applicable law, and the specific conduct involved.

Is taking money from a business always a breach of fiduciary duty?

No. Owners and managers may legitimately receive compensation, distributions, reimbursements, or other payments. The legality of a transaction depends on factors such as authorization, disclosure, the governing documents, and applicable law.

Can a minority business owner sue the majority owner?

Potentially. Minority owners may have legal rights depending on the entity structure, governing documents, and applicable state law. Some disputes may involve fiduciary duties, shareholder rights, oppression, contractual claims, or derivative actions.

What if my business partner is competing with out company?

Competition can raise serious legal issues depending on the relationship between the parties, the applicable agreements, the information being used, and how the competing business was established.

Do I need to go to court?

Not necessarily. Some business disputes can be resolved through negotiation, mediation, or a negotiated ownership separation. Litigation may become necessary when the parties cannot resolve the dispute or when immediate court intervention is needed.

Protecting Your Business Before a Dispute Happens

The best time to address many business disputes is before they begin.

Business owners should consider having clear agreements addressing:

• Ownership percentages

• Voting rights

• Management responsibilities

• Compensation

• Distributions

• Access to financial records

• Confidential information

• Competition

• Business opportunities

• Buyout rights

• Ownership transfers

• Deadlock procedures

• Dispute resolution

A well-drafted agreement cannot prevent every disagreement, but it can provide a framework for resolving disputes before they threaten the business itself.

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A dispute between business owners can involve much more than hurt feelings or a disagreement over how a company should be managed.

When an owner, director, officer, or other person with significant authority allegedly uses their position for personal benefit, the situation may raise issues involving fiduciary duties, corporate governance, contracts, or other areas of business law.

The right response depends on the facts.

If you believe a business partner, shareholder, director, or manager has acted against the interests of your company, obtaining legal advice early can help you understand your rights and determine whether negotiation, litigation or another strategy makes sense.

References

1. Missouri Revisor of Statutes — § 351.850, Court Action to Protect Shareholders. Missouri law addressing certain claims involving oppression, unfair prejudice, fraud, illegality, and management deadlock in statutory close corporations.

2. Missouri Revisor of Statutes — § 351.800, Shareholder Agreements. Missouri statutory provisions concerning written agreements governing corporate powers, management, and shareholder relationships in statutory close corporations.

3. Illinois General Assembly — 805 ILCS 5, Business Corporation Act of 1983. Illinois statutory provisions governing corporations, including provisions concerning fiduciary-duty liability of directors.

DISCLAIMER: This article is for informational purposes only and does not constitute legal advice. Reading this article does not create an attorney-client relationship. Laws change regularly and the application of any rule depends on the specific facts of each case. For guidance regarding your specific situation, please contact A & L, Licker Law Firm, LLC directly.