People generally trust their business partners to be ethical and competent. Unfortunately, some people overstate their abilities or industry connections. Others may begin a business enterprise in the hopes of stealing from their business partners or embezzling from the company they create together.
A partner who has invested substantially in a company may realize too late that the person they took on as a partner does not have the same intentions that they do. They may suspect that their partner has breached their fiduciary duty to the organization. Business owners and executives, as well as investors and shareholders, should typically do their best to act in the company’s best interests.
Executives and owners, in particular, owe a company a fiduciary duty. The best interest of the organization should come before their own desires or goals. How can one partner protect themselves when they suspect a substantial breach of fiduciary duty on the part of a business partner?
By having a difficult conversation
When one partner has proof that the other has violated their fiduciary duty to the company, they may be able to resolve the matter privately. In fact, some partnership agreements require an attempt to resolve the matter amicably before involving the courts.
The partner concerned about the situation can arrange for a sit-down meeting. The partner who has not acted in the best interests of the company may acknowledge that they embezzled, engaged in self-dealing or completed transactions that were not beneficial for the company. They may then be able to arrange a solution that both agree is appropriate.
By initiating litigation
Amicable resolutions are not always feasible. The partner at fault may refuse to admit their actions. A significant breach of fiduciary duty can lead to business litigation. One partner can take legal action against the other. Depending on the scope of the breach and the impact it had on the company, there are several solutions people may seek in court after a breach of fiduciary duty.
In some cases, one partner may seek to buy the other out of the company to protect against future misconduct. Other times, they may seek damages from the partner who did not act in the best interests of the organization. Business litigation is sometimes necessary to recoup losses and prevent a partner from continuing their misconduct to the detriment of the company.
A partner’s breach of fiduciary duty can damage the trust that is necessary for a working relationship. It can also diminish the returns the other partner receives on their investment. Initiating a lawsuit based on a partner’s breach of their fiduciary duty can potentially protect an ethical partner’s investment and the organization itself. Those who respond proactively to signs of embezzlement and financial misconduct can work to minimize the harm a partner’s misconduct could cause.