Dealing With Fiduciary Duties to a Business Partner Upon Exit

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It is an old saw that partners, co-venturers, and insiders to closely held businesses owe fiduciary duties of loyalty and due care when dealing with one another. Importantly, these fiduciary duties modify the common law of fraud by imposing an affirmative duty upon the fiduciary to disclose material facts to the beneficiary, which, if breached, renders a material omission unlawful. But this assumes a commonality of interest in the operation of the business. How do these duties operate when a business partner is negotiating the terms of her exit from the business venture, and especially where the departing partner is asked to provide a general release of all known and unknown claims as part of her exit package? In that situation, the business and the remaining partners have interests at odds with those of the departing partner — the departing partner seeks to maximize her compensation, while the business’s interests are best served by minimizing the compensation paid and securing protection against any future potential liability through the general release. But does that mean the business can remain silent about facts that might have induced the departing partner to demand more money or refuse to sign the release, without violating a fiduciary duty and thereby voiding the release?

The answer is yes, provided that care is taken to be clear that the parties understand and agree that the parties’ interests are adverse and no fiduciary duties are owed in these circumstances.

The New York Court of Appeals has recognized that “[w]here a principal and fiduciary are sophisticated parties engaged in negotiations to terminate their relationship … the principal cannot blindly trust the fiduciary’s assertions” or rely on the fiduciary to disclose every particular fact about a transaction. Centro Empresarial Cempresa S.A. v. America Movil, S.A.B. de C.V.,17 N.Y.3d 269, 279 (2011). Rather, “[a] sophisticated principal is able to release its fiduciary from claims — at least where … the fiduciary relationship is no longer one of unquestioning trust — so long as the principal understands that the fiduciary is acting in its own interest and the release is knowingly entered into.” Id. at 278. As the First Department put it, to hold otherwise would effectively conclude that “a fiduciary can never obtain a valid release without first making a full confession of its sins to the releaser, a proposition that has never been the law.” Arfa v. Zamir, 76 A.D.3d 56, 60–61 (1st Dep’t 2010).

While nothing will preclude a departing partner from later seeking to renegotiate the terms of her separation or vitiate a complete release of claims on grounds that the business failed to disclose important facts in violation of its fiduciary duties, businesses can take steps to ensure maximum protection under Centro and its progeny. A business is well-advised to add provisions into the separation agreement with the departing partner to make clear (i) that everyone understands and agrees that the departing partner and the business are acting in their own separate interests with respect to the separation, (ii) the departing partner has had an opportunity to separately secure whatever legal, financial, or other counsel she feels necessary to advise her on the terms of separation, and that she is not looking to the business for such guidance or advice, and (iii) it is expressly understood and agreed that the business does not stand in fiduciary relationship to the departing partner with respect to the negotiation of the terms of separation or of the release.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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