business fiduciary-duties
Do Directors serving at the pleasure of a specific class of investor owe fiduciary duties to other classes of investors?
<p>Suppose a company has five directors.  Two appointed by holders of common stock and three appointed by holders of preferred stock.  Do the directors appointed by the preferred stockholders have a fiduciary responsibility to all of the shareholders or just the preferred shareholders?  That is, can they act in the best interests of the preferred stockholder without regard to the interests of the common stockholders.</p>

<blockquote>
  <p>Do the directors appointed by the preferred stockholders have a
  fiduciary responsibility to all of the shareholders or just the
  preferred shareholders? That is, can they act in the best interests of
  the preferred stockholder without regard to the interests of the
  common stockholders.</p>
</blockquote>

<p>The duties of directors of corporations are usually set out of the statutes of the jurisdiction where the corporation is organized, and in some jurisdictions, such as the State of Delaware, there is a very significant ability of corporate organizers to very the obligations of directors by agreement in articles of incorporation and bylaws.</p>

<p>This said, the overwhelming majority position would be that a director elected by a particular subset of shareholders would owe the same legal duties to the corporation as a director elected by all of the shareholders at large. In other words, they have a legal duty to act in good faith in the best interests of the corporation. Sometimes these duties are full fiduciary duties, and sometimes these duties established by statute include duties of care and duties of loyalty that are narrower than the fiduciary duties owed, for example, by a trustee to the beneficiaries of a trust.</p>

<p>Generally speaking, directors owe their duties primarily to the corporation as an entity overall, and not to the shareholders generally, or to any subset of shareholders. </p>

<p>But, there is case law that provides the owners or directors of a corporation who control the corporation are not allowed to take actions using their voting and control powers that "oppress" the minority owners of the corporation. These duties arise even at the shareholder levels, despite the fact that shareholders aren't normally seen as owing duties, fiduciary or otherwise, to anyone.</p>

<p>For example, suppose that a corporation is an S-corporation in which corporate income is taxable to shareholders whether or not dividends are paid, in which the majority shareholder has other assets from which taxes on the corporation income attributed to the majority shareholder can be paid, but the minority shareholders do not have other assets from which taxes on the corporation income attributed to them can be paid. </p>

<p>Case law in many states has held to if the majority shareholder exercising either shareholder voting level rights or director level powers declines to distribute dividends in order to put pressure on the minority shareholders to sell out at a discount in this situation, that this constitutes official oppression by the majority controlling shareholder and violates the common law legal duties of the majority shareholder to the minority shareholders. The remedies available in these situations also varies considerably.</p>

<p>Of course, as a practical matter, directors elected by a particular constituency are expected to be conscious of the particular needs of the people who put them in office and act accordingly, and this is rarely actionable. But, this is, in part, a function of the fact that the majority of corporations conduct all of their business with the unanimous consent of the directors on a day to day basis. Typically, voting disputes that divide directors into different camps happen only episodically in connection with major transactions like a takeover or leveraged buyout or proxy fight, not in the day to day conduct of the business of the corporation which is almost always left in the hands of senior management, in practice, if not always in legal formal terms.</p>

<p>Under Australian Corporations Act <a href="http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s181.html" rel="nofollow noreferrer">s181</a> a director owes a duty to the corporation - not to the shareholders or any subset of them. This duty is not a fiduciary one in general - they must exercise care and diligence that a reasonable person would exercise subject to the business judgement rule <a href="http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s180.html" rel="nofollow noreferrer">s180</a>.</p>
