People typically enter into business partnerships with the best of intentions. But when things go awry down the road, the minority partner may claim that the majority owner violated a fiduciary duty by failing to act in the best interests of the business or by acting so recklessly that it amounts to gross negligence. Before things go off the rails and the lawyers start firing off nasty letters, it is helpful to develop a basic understanding of the fiduciary duties that apply to those who control the company — officers, directors, managers and general partners. This post focuses on these fundamental questions: What are fiduciary duties and what conduct do they require?
The First Question: Was There a Duty?
For a disgruntled minority partner, the first step is to determine whether the person who may be the subject of a claim owes a fiduciary duty to the company or its owners. Certain roles are usually subject to fiduciary responsibilities under Texas law — such as business partners, corporate officers and directors, or managers of an LLC — and these individuals are expected to act with loyalty, honesty, and care toward the business and, in some cases, its owners. But, as discussed below, the company’s governance documents may limit, or in some cases, eliminate the fiduciary duties of company officials or remove their monetary liability. As a result, it is critical to check the bylaws (corporations), the company agreement or regulations (LLCs), or partnership agreement (limited partnerships) to determine what limits they may impose on fiduciary duties.
Things can also get murkier in closely held businesses, especially those involving friends or family as co-owners. Many people assume the existence of long-standing personal relationships will impose fiduciary duties on one or both of the parties. In Texas, that’s usually not the case. Parents, siblings and close friends do not automatically become fiduciaries just because they trust each other. Courts typically require specific evidence of a deeper, pre-existing relationship of trust that existed before the business arrangement — not just trust that developed as part of it. That distinction often comes as a surprise, especially in family business disputes.
It is important to understand, as well, that defendants in a fiduciary duty case will ultimately bear the burden of proof if it is established that they owe a fiduciary duty. The average person typically assumes that the plaintiff always bears the burden of proof, but that is not always the case in fiduciary litigation.
Check the Fine Print
In May 2025, the Texas Legislature amended the Business Organizations Code to allow LLCs and limited partnerships to eliminate the duties of loyalty, care and good faith for managers, officers and general partners(seeTBOC Section 101.401). In addition, while corporations cannot eliminate the duties of loyalty and good faith, TBOC Section 21.418(f) provides that officers and directors are not liable for engaging in interested transactions unless it is established that they engaged in fraud, intentional misconduct or knowing violations of law. In addition, corporations can stipulate in their governance documents that their officers and directors are not liable to the company or its owners for monetary damages resulting from their acts or omissions.
Thus, the company’s governance documents may significantly shape the fiduciary duties that would otherwise apply and include provisions that:
- Limit liability for certain decisions
- Allow conflicts of interest if properly disclosed and approved
- Replace traditional fiduciary duties with contract-based standards
In some LLCs, for example, managers may have reduced duties so long as they act in good faith and follow the agreement. And corporate directors and officers are often protected from liability for simple negligence, though not for conduct amounting to fraud or self-dealing.
The bottom line is that an initial review of the company’s governing documents is critical as it may often determine whether a claim is viable — or not.
Not All Bad Decisions Constitute Breaches of Fiduciary Duty
It is also important to understand that not every poor business decision amounts to a breach of fiduciary duty. Business leaders are generally protected by what’s known as the business judgment rule. This means courts won’t second-guess decisions that were made in good faith, with reasonable care, and in what the decision-maker believed was the company’s best interest — even if those decisions ultimately turned out badly. Problems arise, however, when someone:
- Puts their personal interests ahead of the business
- Uses company assets for personal gain
- Hides important information
- Engages in unfair or self-interested transactions
The business judgment rule that applies to these claims was codified in the same amendments to the TBOC that the legislature passed in May 2025 (see TBOC 21.419). The new form of rule applies to Texas corporations that are publicly traded and to corporations and LLCs that opt into this new section in their certificates of formation, bylaws, or company agreements.
The statute presumes that officers, directors and managers acted (i) in good faith, (ii) on an informed basis, (iii) to further the corporation’s interests, and (iv) in compliance with applicable law and the corporation’s governing documents. The plaintiff bringing the claim has the burden to rebut these presumptions and must also plead with particularity that the alleged breach constitutes fraud, intentional misconduct, an ultra vires act, or a knowing violation of law.
Who Owns the Claim — the Minority Owner or the Company?
One of the most confusing aspects of fiduciary duty cases is determining who has the right to bring the claim. In many cases, the harm at issue is suffered by the company — when company funds are diverted or its assets are wasted or misused. Those claims for injury to the company typically belong to the company, not to the individual owners. Therefore, to pursue this type of claim, the minority owner will need to bring a derivative claim on behalf of (in the name of) the business. On the other hand, if the individual owner was personally harmed — such as losing voting rights or if the owner’s interest was unfairly diluted — the owner may have a direct claim.
This distinction isn’t just technical. Filing the wrong type of claim can result in dismissal of the case. There are a variety of procedural rules the minority owner will be required to follow to bring a derivative claim, but there are two types of derivative paths in Texas depending on the size of the company. The first type has a host of procedural/statutory requirements, including providing the company with formal written notice and an opportunity to respond within 90 days before filling suit (seeTBOC 21.553). The second category of derivative claims exists when closely held companies are involved (i.e., companies that are not publicly traded and have less than 35 shareholders), and in those instances, the procedural rules are relaxed and no notice is required before a minority owner may bring a direct action in the name of the company(see TBOC 21.563). The rules for recovering damages to the company can also be different in closely held entities.
Evidence Can Make or Break the Case
Fiduciary duty disputes are rarely decided based on who tells the better story. They’re usually decided based on documents and, in many cases, on the testimony and analysis of financial or valuation experts. Financial records, emails, text messages, contracts, and internal communications often provide the clearest picture of what actually happened to cause a dispute. In many cases, early access to these materials can quickly reveal whether a claim is strong or whether it’s likely to fall apart under scrutiny. One of the first things to consider is what evidence exists to support the claim and how readily it can be obtained. Gathering this evidence before the first meeting with an attorney is advisable.
What Recovery Is Permitted?
If a fiduciary duty was breached, the law offers several potential remedies, but remember that under the amendments to TBOC, the standard of proof has been heightened. The plaintiff is going to have to establish that the governance person engaged in fraud, intentional misconduct or knowing violations of law in order to recover. As noted above, however, this is where burden shifting rules get tricky. If that hurdle can be met, however, the minority owner may be able to recover financial losses, such as lost profits or diminished business value, and in some cases, courts can require the wrongdoer to return profits they gained from their misconduct — even if the plaintiff cannot prove traditional (actual) damages suffered.
When fraud or intentional wrongdoing is established, additional damages and legal or equitable remedies may be available, including temporary and permanent injunctive relief and the imposition of a receivership or constructive trust. Courts can also step in to unwind improper transactions or impose other remedies to protect the business.
Conclusion — Making the Right Call Early
Fiduciary duty cases are complex because they sit at the intersection of business relationships, legal obligations of the parties, and written agreements, and therefore, the minority owner may be able to assert claims for breach of contract, as well as claims for breach of fiduciary duties, or sometimes only breach of contract. At their core, these cases revolve around a few key questions:
- Did the defendant owe a fiduciary duty?
- Was that duty limited by some agreement?
- Was the duty actually breached?
- Who was harmed by the breach and how?
- Is there enough evidence to prove the breach?
- Is emergency relief necessary?
- Is the heavy cost worth the requested relief?
Answering those questions early — and objectively — can save significant time, expense, and frustration down the road.
In sum, when a minority owner has a potential claim for breach of trust against a business partner, it requires a realistic evaluation of the claim, the evidence and the desired relief. This analysis is necessary as the first step to decide whether to pursue the claim, negotiate a resolution, or take a different path forward. Similarly, if a majority owner is faced with this type of allegation, an objective evaluation of the law, the evidence supporting the claim and damages sought is essential to assess whether to gear up to battle the claim head on or seek an early resolution.
