Business Insights

In perspective

Duty of Loyalty and Duty of Care: How do they complement and benefit each other?

September 30, 2017

The fiduciary duties of loyalty and care obligate the management board members to accomplish their legal responsibilities with a company’s shareholders, and they are both crucial to avoiding conflicts of interests and giving transparency to the administrative management.

The Duty of Loyalty was included in the U.S. law in order to avoid that unethical managers get improper personal benefits, taking advantage of their position and betraying the trust of the shareholders.

On the other hand, the Duty of Care makes reference to the responsibility or legal obligation of a person or an organization to prevent actions or omissions that could harm others.

It’s the Duty of Care to which an accountant adheres in preparing the financial statements of a company or a director in managing the resources under his control, or which the parties of a pact assume to each other.

Some authors think that, indeed, there’s only one basic duty, the Duty of Loyalty, and that the Duty of Care is in itself one of its components, (The Harvard John M. Olin Discussion Paper Series).

The fact is, that the commercial transactions are more transparent when the parties are ruled by these duties.

For example, to reach a better deal in selling a family company, it’s essential you have the certainty that the institutional investors will protect the assets you leave temporarily under their control.

When they assume the task of optimizing the way a family business operates, a bridge fund investors take responsibility for the decisions they make when aligning the interests of the selling party and those of the prospective buyers to get a benefit for both parties.

It can be trusted they will keep and protect the business assets, both tangible and intangible, such as trade secrets and the owners interests, while increasing the sales perspectives of the organization.

By joining the company during the process, this investment funds adhere to the duties of loyalty and care, both to optimize the management by taking care of the business’ interests and to invest their own resources in order to get the best possible benefit for the owner and the long term investors.

When a team doesn’t adhere to the Duty of Loyalty and the Duty of Care, it could try to control the inside information and use it to handle the situation to their favor.

On the contrary, within an ethical process in which the institutional investors are ruled by these duties, an alignment of interests is achieved among the family business and the prospective buyers, so the selling party gets the greater welfare and the buying party gets a greater perspective of growth for the business.

When choosing a bridge fund for the process of optimizing a family business for its sale, it is essential to ensure that it has experience and a good record of complying the trust duties. That’s the key to forge a trust relationship and to bring the transaction to a successful end.