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Do You Owe a Duty of Care to Investors in Your Business?

Many California business owners owe duties of care to their investors under California law. Generally, the duty of care requires business owners to act in good faith and in the best interests of the business. It is one of several fiduciary duties, along with the duty of loyalty and others. Whether the duty of care applies and to whom it applies depends on the type of business entity.

In corporations, officers and directors must obey the duty of care by performing their duties “in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.” California Corporations Code § 309(a). This code section’s language ties directors’ and officers’ actions to the best interests of the shareholders. California courts have been occupied deciding whether directors did take care and conduct reasonable inquiries for many years. In many instances where directors’ conduct does not rise to the level of recklessness, directors are protected from personal liability for actions that violate the duty of care.

In partnerships, the duty of care’s scope differs substantially from its scope in corporations. Partners merely must “

[refrain] from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.” California Corporations Code § 15904.08(c). This much more limited duty does not require a partner to consider how an ordinarily prudent person would act, only to avoid gross negligence or worse. In limited liability companies, managers owe the same duty of care as in partnerships unless it is modified by agreement. California Corporations Code § 17153.On a more basic level, many investors in businesses have an agency relationship with the business owners. An agent represents another person, called a principal, in dealings with third parties. When an investor gives a business money for the purpose of furthering the business and engaging in transactions with third parties, the business owes fiduciary duties to the investor. For example, agents must make full disclosures and be faithful to the principal. California Civil Code § 2295 et seq. These duties intersect with the duty of care in corporations and partnerships.

Forward-thinking businesses seek out legal advice before problems arise. Protect yourself and your business by seeking out an experienced business attorney to help you interpret your duties to investors. Michael Leonard, Esq., of San Diego Corporate Law, named a “Rising Star” for 2017 by SuperLawyers, has years of experience with California securities laws. To schedule a consultation, e-mail San Diego Corporate Lawor call Mr. Leonard at (858) 483-9200.

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