Fiduciary rights and obligations are very confusing. Courts impose appropriate duties on participants in different relationships: between the employee and the employer, the doctor and the patient, the manager and the beneficiary, the lawyer and the client, and so on. Moreover, the fiduciary is required to follow a general duty, which at the same time differs in many variations in each particular case. In addition, courts impose ad hoc obligations in those relationships where one person trusts the other, resulting in damage. In the article, we consider the concept of fiduciary responsibility, the formation of this institution in the United States and Russian experience.
The concept
A fiduciary obligation is an obligation to refrain from actions aimed at one's own benefit regarding the beneficiary's asset in the exercise of authority. The care and discretion shown in this case is not inherently fiduciary, since it can also appear in other legal relations.
A fiduciary duty is a mechanism that provides protection in those situations in which the implementation of actions at the discretion of one person should be monitored due to specific legal relationships with another person. Many lawyers believe that these relationships are characterized by unlimited powers of the fiduciary and the inability to control its actions by the beneficiary.
The reason for this lies in the fact that the beneficiary has neither the information nor the proper qualifications to understand the situation. Therefore, there is a compensation mechanism through judicial review.
Fiduciary Relations in the USA
Consider how fiduciary relations developed in the United States. Initially, they were based on the fact that the fiduciary renounces his interests and performs activities only in the interests of the beneficiary. The high quality standard for fulfilling fiduciary duties was used in the Meinhard Salmon case, where the judge interpreted the relevant relationship as a moral imperative. The case concerned a joint venture. It strongly influenced the subsequent development of responsibilities also within closed corporations.
The Meinhard-Salmon Case
The judge used the fiduciary principle in the broadest sense, saying that the partners of the joint venture are partners and, carrying out the business together, bear obligations to each other through the manifestation of the highest devotion. Much that is allowed in ordinary cases in contractual relations is prohibited for persons who bear fiduciary duties. Along with honesty, their behavior should be characterized by respect for each other.
Case of Donak
Further, in closed corporation cases, ethical standards of conduct also played a more important role than declared legal standards and rules. For example, in the Donak case, the court acknowledged that the participants were assigned virtually the same fiduciary duties as the partners in the joint venture (partnership). They are expressed in devotion and good faith in the highest manifestation of these qualities. That is, shareholders are not entitled to act solely for their own benefit. This violates the principles of loyalty to other shareholders, as well as corporations. The court noted that due to the impossibility of minority shareholders to sell shares of the majority, they can easily use this provision. Thus, in a closed corporation, this situation contributes to the abuse of majority rights by their rights and obligations.
Vike Springside Nursing Home Inc.
About exactly how the fiduciary duties of participants in corporate relations were violated, it is said in the Vike Springside Nursing Home, Inc. case, where, in fact, the second degree of development of the relevant legal relations is expressed.
In this case, there was a conflict of interest. According to the court’s ruling, the obligations of the fiduciary depend on the ability of the controlling participant to demonstrate the purpose of their actions as to whether they correspond to the interests of the company or not. If this is possible, the presumption is valid that the contested action does not violate the assigned duties. The exception is cases in which minority shareholders will be able to prove that the goal could be achieved in another way that less damages their interests. In view of the fact that in Vykes the majority of shareholders did not demonstrate a business purpose, the court found a violation of their duties, for which fiduciary responsibility followed.
Case "Smith v. Atlantic Properties Inc."
Another significant case was called Smith in. Atlantic Properties, Inc. In it, the court considered that the conduct of the controlling shareholder was justified as long as it had a more compelling reason for the relevant behavior compared to the non-controlling shareholder. In this case, the provision was finally approved that fiduciary duties would not be considered violated if reasonable and justified reasons for the violation of minority rights were presented.
Pragmatic approach
In the future, there was a departure from the standard of loyalty and honesty, which were voiced in the Donak case, and a more pragmatic approach was taken, in which the interested behavior of the controlling shareholder was allowed. He was forbidden only to harm minority shareholders intentionally.
At the same time, the courts ruled that controlling shareholders violated their obligations only if they abused their powers, and also removed minority shareholders from participating in profits in a deliberate way. Although the courts also called the actions of the controlling shareholders a violation of their duties, in reality this happened as a deliberate tort, the purpose of which was to supplant minority shareholders. As a result of this practice, the original essence of the concept was lost.
Case "Sid in. Sid"
The corresponding rhetoric was especially visible in the "Sid in. Sid" case. The court indicated that the obligation was to restore the violated right, and not to reconcile the relevant business interests. Therefore, if fraud, dishonesty, violation of fiduciary duties and other illegal acts are not recorded, this means that there are no reasons for going to court.
After that, the courts began to demand from the minority shareholder evidence that the majority vote violated the rights not once, but several times. As a result of this, a tort of repression began to develop.
crowding out
This theory is set forth in detail in the case of Sugerman v. Sugerman. The court concluded that the minority shareholder needed to prove the fact of the use of majority mechanisms by several mechanisms, as a result of which the minority shareholder was removed from the distribution of profits in the form of dividends or salaries. Thus, it should have been shown that the offer to sell the block of shares at a reduced cost was the culmination of crowding out a minority shareholder. Appropriate actions should have been unprofitable for the minority minority, violation of the majority - be intentional, and the deprivation of income - intentional.
It turns out that if earlier the courts were indifferent to the categories of guilt and violation of the law, then at this stage they began to allow the possibility of actions of the fiduciary administrator in their own interests. Moreover, such actions were no longer illegal.
Fiduciary duties in Russia
In our country, this institution was formed recently. It is expressed in the obligation of participants to function in good faith and reasonably. There are fiduciary duties of the board of directors under Russian law, as well as persons who can actually direct corporate actions.
For example, in the UralSnabKomplekt case, controlling persons were brought to responsibility in connection with the fact that they exercised control over the actions of a legal entity. At the same time, the duties of the director included only the adoption of such decisions that are beneficial to the beneficiaries.
The fact that the expression “conscientiously and reasonably” is not indivisible phraseological units (as previously was supposed in the courts), the Presidium of the Supreme Arbitration Court of the Russian Federation clarified only in 2012 in the case of the Kirov Plant. The court ruling said that these terms have their own separate meaning.
Based on existing jurisprudence to date, we can say that Russian law has only just begun to turn to fiduciary duties. And therefore, the judicial practice has not yet had time to develop completely. However, general trends are still outlined.
Conclusion
Despite the small judicial practice in our country, it is possible to distinguish certain features inherent in fiduciary duties, namely:
- They can be used by turnover participants to determine the standard of behavior of a participant in corporate legal relations in the event that the legislation does not provide for a specific norm.
- The basic principle is the priority of corporate interest over the interests of individual participants. Therefore, the relevant responsibilities are to carry out vigorous actions in the corporate interest and not to harm the company.
- In contrast to the fiduciary duties of the director of an LLC or a company of a different legal form, the minority shareholder’s duties do not include active actions. But he can block the decision of the corporation. If this is contrary to corporate interests, there is a violation of fiduciary duties.
- Relevant duties may be directed to a third party if they can influence the decision-making of the corporation, thereby abusing them. A third party should put corporate interests above their own.
As you can see, the understanding by the courts of fiduciary duties in Russia is significantly different from what has developed in the United States, although this practice has recently existed.