Fiduciary Duties of Members, Managers, Officers, and Shareholders in Virginia

The information in this article is for general informational purposes only and does not constitute legal advice. Laws change and individual circumstances vary. Consult a licensed Virginia attorney about your specific situation. Reading this article does not create an attorney-client relationship nor does merely contacting our office through this website or any other means.

---

People who control businesses owe legal obligations to the businesses they control and to the other owners. These obligations are called fiduciary duties, and they arise under Virginia statute and common law regardless of whether they are spelled out in a written agreement. Understanding what these duties require, how they differ between business entities, and what happens when they are violated is important for any business owner or investor in the New River Valley and throughout Virginia.

The Two Core Fiduciary Duties

Fiduciary duties in the business context generally consist of two primary obligations:

Duty of Care

The duty of care requires those who manage a business to act with the care that a reasonably prudent person in a similar position would exercise under similar circumstances. This means:

• Making decisions based on reasonably available information
• Acting in good faith
• Exercising independent judgment rather than blindly rubber-stamping others’ decisions

The duty of care does not require perfection. Business decisions can turn out badly without resulting in a breach of the duty of care. The standard is one of reasonable conduct, not perfect foresight.

Duty of Loyalty

The duty of loyalty requires fiduciaries to act in the interest of the business and its owners, rather than in their own personal interest. It prohibits:

• Self-dealing: Entering into transactions on behalf of the business that benefit the fiduciary personally, without proper disclosure and approval
• Usurping corporate opportunities: Taking business opportunities that belong to the company for personal benefit
• Competing with the business: Using position and knowledge to operate a competing enterprise at the business’s expense

The duty of loyalty is the more commonly litigated of the two duties, because violations often involve a controlling member or manager who has directed business resources or opportunities to themselves or related parties.

Fiduciary Duties in Virginia LLCs

The Virginia Limited Liability Company Act addresses fiduciary duties at Va. Code § 13.1-1024.1. Under this provision, managers of a manager-managed LLC owe fiduciary duties to the LLC and its members. In a member-managed LLC, the members themselves owe these duties to the extent of their managerial authority.

Virginia law permits the operating agreement to modify or expand the fiduciary duties owed, subject to limitations. However, the operating agreement cannot eliminate the duty of loyalty entirely, nor can it authorize conduct constituting bad faith, willful misconduct, or knowing violation of law.

The ability to modify fiduciary duties through the operating agreement is significant. Parties drafting an operating agreement should consider whether the default statutory duties fit their situation. For example, an operating agreement for a real estate holding company where one member also operates other real estate ventures might explicitly permit certain transactions between the member’s other entities and the LLC, provided appropriate disclosures are made.

Fiduciary Duties in Virginia Corporations

For corporations, the Virginia Stock Corporation Act governs at Va. Code § 13.1-690 (directors) and related provisions for officers. Directors owe fiduciary duties to the corporation and, through it, to the shareholders. These duties include:

• Discharging duties in good faith
• Acting with the care of a reasonably prudent person in a similar position
• Acting in a manner reasonably believed to be in the best interests of the corporation

Officers owe similar duties in their capacity as officers.

The Business Judgment Rule

Virginia courts apply the business judgment rule to evaluate claims that a director or manager breached their duty of care. Under this rule, courts will not second-guess a business decision that was:

• Made in good faith
• Made on an informed basis (meaning the decision-maker reviewed reasonably available information)
• Made in the honest belief that the action was in the best interest of the company

If those conditions are met, the court will not substitute its judgment for that of the directors or managers, even if the decision turned out badly. The business judgment rule recognizes that courts are not well-positioned to evaluate business decisions after the fact, and that holding managers liable for every poor outcome would chill legitimate business risk-taking.

The business judgment rule does not protect decisions tainted by self-interest, bad faith, or inadequate deliberation. When a director or manager has a personal financial interest in a transaction, the protections of the business judgment rule may not apply.

Self-Dealing and Conflicts of Interest

Self-dealing occurs when a fiduciary enters into a transaction on the business’s behalf in which the fiduciary has a personal interest. Common examples include:

• An LLC manager directing the company to lease property from the manager’s own real estate entity at above-market rates
• A corporate officer awarding a contract to a vendor in which the officer holds an undisclosed financial interest
• A majority member using company funds to pay personal expenses

Virginia law does not prohibit interested party transactions entirely, but it imposes disclosure and approval requirements. For corporations, Va. Code § 13.1-691 addresses director conflicts of interest, generally allowing interested director transactions if:

• The material facts are disclosed and the transaction is approved by disinterested directors or shareholders, or
• The transaction is fair to the corporation at the time it is authorized

For LLCs, the operating agreement typically governs how conflicts of interest must be handled, and the default LLC Act provisions address the issue for the absence of agreement.

Minority Member Rights

Minority owners in closely held businesses are particularly vulnerable to fiduciary duty violations, because they often have no meaningful ability to oversee day-to-day management and no ready market for their ownership interest if the majority is misusing control.

Virginia law protects minority members and shareholders through several mechanisms:

• The ability to bring a derivative suit on behalf of the company when those controlling the company have harmed it and refuse to pursue claims themselves
• Direct claims against controlling members or directors who have personally injured the minority owner
• Inspection rights that allow members and shareholders to examine company records under appropriate circumstances

For minority owners who suspect mismanagement or self-dealing in a New River Valley business, understanding these rights and the evidence needed to support a claim is an important starting point.

Derivative Suits in Virginia

A derivative suit allows a member or shareholder to bring a lawsuit in the name of the company when those controlling the company have committed a wrong against it and refuse to take action. In Virginia, derivative claims for LLCs are addressed under Va. Code § 13.1-1042 and related provisions; for corporations, the relevant provisions are in the Virginia Stock Corporation Act.

Before filing a derivative suit, Virginia generally requires the plaintiff to make a demand on the board or managers to take action, unless such a demand would be futile because those who would evaluate the demand are themselves implicated in the wrongdoing.

Derivative suits are procedurally complex and can be expensive. They are appropriate when the harm to the company is substantial, the fiduciary breach is well-supported by evidence, and other remedies are unavailable.

What Happens When Fiduciary Duties Are Breached

A party who successfully proves a breach of fiduciary duty in Virginia may be entitled to:

• Compensatory damages: The loss actually caused by the breach
• Disgorgement of profits: Requiring the fiduciary to give up profits improperly obtained
• Injunctive relief: Preventing ongoing misconduct
• Punitive damages: Available in cases of willful or wanton conduct, though subject to limitations

Courts may also order equitable remedies appropriate to the circumstances, including the appointment of a receiver or the dissolution of the business in severe cases.

If you are a business owner or investor in the New River Valley who has concerns about how a business is being managed, or if you are a manager or officer concerned about a potential conflict of interest in a transaction, consulting with a Virginia business attorney can help you understand your rights and obligations under the law as it applies to your specific situation.

---

This article is general information only and is not legal advice. Do not rely on this article to make decisions about your specific situation. Contact Valley Legal or another licensed Virginia attorney to discuss your case. Attorney advertising.

Valley Legal, PLLC is located at 107 Pepper St SE, Christiansburg, Virginia 24073, and serves clients throughout the New River Valley of Virginia, including Montgomery County, Blacksburg, Radford, Pulaski, and surrounding communities.