Too Many Tiaras: Conflicting Fiduciary Duties in the Family-Owned Business Context

Abstract

Family-owned businesses have been called the “backbone of the U.S. economy,” but passing control of a family business to the next generation is so complex that the majority of family businesses do not survive the transition. A common scenario that leads to problems is where owners want to leave the business to their children but only one child is interested in and capable of managing the business. A popular solution is to leave the interested child an equal share of the business together with management control, and leave the other children interests in the business in trust, with the manager child as trustee. This raises difficulties for the manager/trustee, because the fiduciary duties of a trustee are much stricter than those of a business entity fiduciary. The children whose shares are in trust may also be disadvantaged, if the manager/trustee child is able to use the lower business fiduciary standard to reduce the value of the trusts’ interests in the business. The resulting uncertainty and litigation increase the likelihood that the business will not surviveThis article first reviews the specific duties owed by trustees and by fiduciaries of the various business entity formats. It then analyzes the theories supporting imposition of fiduciary duty and the purposes of fiduciary duty in the various roles, in order to determine what level of duty is essential to the trustee/business fiduciary. Next it reviews case law where courts have had to identify the applicable fiduciary duty for a dual role fiduciary. Finally, it argues for a new, hybrid duty, that allows for the flexibility to take on risk as needed in the business context and accommodation for the fiduciary’s personal interests in the business but still recognizes the vulnerability of the status of trust beneficiary. A clearer level of duty tailored to this unique position would protects not only the business owners but all who benefit from the continued viability of the family business.