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Lecture 16

AFM 231 - Lecture 16 (2013.03.12).doc

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Accounting & Financial Management
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AFM 231
Sally Gunz

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AFM 231 – Business Law Tuesday, March 12, 2013 Lecture 16: Fiduciary Duties If yes to any of these (and many others)  Or, if you intend to interact with any of the above.  Then, you had better ensure you understand what fiduciary responsibility means and how it works. What is a fiduciary relationship?  Relationship that exists because the law of equity says it does.  Why does the law impose this relationship in particular circumstances? Because the relationships require trust – beyond that of a normal contract.  Critical thing to understand: once the relationship is said to be fiduciary, the obligations are imposed and you cannot avoid (contract out of) them.  Let’s look at examples.  The current test of whether/not there is a fiduciary relationship: are there “elements of trust and confidence and reliance on skill and knowledge and advice” (Hodgkinson and Simms 1994)  Typically fiduciary relationships are either business or personal (e.g. teacher, trustee, parent). Here we focus on the business. Fiduciary Duties: • P565 or 309 • For example: o Avoid conflicts of interest – literally avoid o Do not use the relationship for personal profit (ie secret commission) that profit belongs to the beneficiary o Follow all of the beneficiary’s instructions o Disclose all relevant information to the beneficiary o Act honestly, in good faith, and with due care o Keep beneficiary’s information confidential o The two principal problems: normally not allowed. Where it is, why would you go along with it (ie - real estate agent acting for both parties) Fiduciary vs. Contract relationships in business  When is an employee in a fiduciary relationship?  If they are an agent of the business  If they are a director or officer of the business  Otherwise, generally they will be an employee  An employee may be a fiduciary for some aspects of their work and not others – e.g. if a senior IT employee is also expected to seek out major sales from time to time.  Businesses may enter into partnerships and they enter joint ventures. Partnerships impose fiduciary duties. Joint ventures are solely contractual arrangements. Important  Think of these duties as the closest thing to the law imposing ethical responsibilities.  We are looking often at relatively ‘high level’contexts. Yet before very long these duties will be imposed on you.  Let’s start by acknowledging what might make us not do what seems fairly obviously the right thing. In a corporate setting  Beginning point: the corporation needs humans to take actions on its behalf.  Officers (e.g. CEO, CFO) and Directors are those humans – as well as all the other agents such as sales staff – who act as its agent.  The fiduciary duties that Officers and Directors owe the corporation are the equivalent of those the agent owes. They just operate in the specialised context of the corporation. Consider duties in practice  What follows are examples of how fiduciary duties might arise in practice in the business context. Example 1  The Board of ABC approves a multi-million dollar contract with Supplier Z. Director S participated in the Board vote. S is also a 10 percent shareholder of Supplier Z.  If we assume X is in a fiduciary relationship with ABC (which s/he is) what duty might ABC argue has been broken?  Is there any way this ‘deal’could be signed without S violating her/his fiduciary duty? Example 2  X is a director of Company ABC. Developer Y gives a presentation to the Board of ABC, asking whether ABC wishes to acquire property from Y. The board unanimously rejects the offer. 6 months later, the Chair of the Board hears that X has bought a half interest in the property from Y and the two are developing it.  If we assume X is in a fiduciary relationship with ABC (which s/he is) what duty might ABC argue has been broken?  Note: what might be ‘fuzzy’about this fact situation? Example 3  Client (C) of Lawyer (L) has money to invest. L suggests to C to invest in real estate and connects C with another client of L looking for $600,000 second mortgage financing in BC at 18%. L does not disclose that her brother had a minor interest in the client. The BC real estate market collapses and the client defaults leaving C with minimal chance of recovering their investment. Does C have any recourse?  Does L owe C a fiduciary duty? Compare this with Hodgkinson vs. Simms p. 565. Example 3  Ais an actuary hired by MNM Corp. to evaluate its defined benefit pension fund. MNM is anxious to have the interest rate used for the calculation to be 8 percent, a rate about two percentage points higher than
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