As a business owner and company director, you will have duties to many stakeholders, including your shareholders and buyer. Fiduciary duties are part of your obligations. Under such duties, you must act in good faith and the best interests of your company and its shareholders. Additionally, you must ensure you act in good faith during the transaction with your buyer. Failure to do this can result in legal penalties and disputes. This article will outline what fiduciary duties during a business sale and how to comply with them.
What is the Business Sale Process?
Conducting a business sale involves several steps, including:
- discussing the sale with your shareholders and directors;
- preparing your business for sale;
- finding potential buyers;
- allowing due diligence and drafting a non-disclosure agreement;
- negotiations;
- drafting your sale and purchase agreement; and
- settlement.
What Are Fiduciary Duties?
Fiduciary duties occur when you must put your stakeholder’s or client’s interests before your own. Hence, as a company owner or board member, you should act in the best interests of your company. This means you must act in good faith, honestly and responsibly.
Additionally, you should not use company information or property for anyone else’s benefit unless you can do so under your company constitution.
During a business sale, you should also act honestly with your buyer. This includes ensuring all information you provide about your business is accurate. Further, you must ensure you do not mislead or deceive the buyer during the process.
Continue reading this article below the formHow Can a Company Director Satisfy Their Fiduciary Duties?
Complying with your fiduciary duties is essential to avoid penalties, disputes or a sale falling through. Firstly, you can talk with your corporate lawyer to understand your obligations and appropriate prevention methods.
From there, you can form compliance strategies. Strategies may include:
- getting your accountant and lawyer to review company documents before providing them to your buyer;
- gaining shareholder consent before conducting the sale;
- keeping shareholders updated about the sales process; and
- taking meeting minutes to keep evidence of any discussions or decisions.
What if I Sell My Business Through a Trust?
If your business exists in a trust and you are a trustee, you will have fiduciary duties to your beneficiaries. Hence, you should act in your beneficiaries’ best interest and fulfil your duties in good faith. Furthermore, you should ensure the business is conducted according to the trust’s objectives and rules.
Additional mandatory duties under a trust include:
- knowing the terms of the trust;
- acting according to the terms;
- acting honestly;
- using your power for proper purposes; and
- acting for the benefit of your beneficiaries.
Additional Duties During a Business Sale
In addition to your fiduciary obligations, you will have other duties to consider as a seller. Firstly, consider which warranties you want to offer to the buyer. Warranties are promises or representations you make. Before making any warranties, you must ensure the warranties are accurate, and all forecasts have been double-checked. Otherwise, you could be engaging in misleading or deceptive conduct.
Secondly, you will need to draft a sale and purchase agreement. This is a legally binding document outlining the terms and conditions of your sale. The terms in your contract should be fair and reasonable. Furthermore, you must fulfil any conditions you promised to complete before the sale. Conditions may include transferring the property lease or any existing business contracts.
Thirdly, if your business has employees, you will have obligations as their employer, such as informing them about the business sale. Furthermore, if the buyer does not offer them employment, you need to pay any outstanding salaries, entitlements and redundancy packages. You can confirm what you need to pay by reviewing the employment contracts.
Looking to sell your business? This free guide will help you to understand the moving parts that impact a successful sale.
Key Takeaways
You will have fiduciary duties to your shareholders, company and prospective buyers during a business sale. Hence, you should act in their best interests and ensure honesty and responsibility throughout the sale. To satisfy your duties, you can develop compliance strategies with the help of your corporate lawyer. Further, note that if your business is in a trust, you will owe fiduciary duties to your beneficiaries. You will also have additional duties apart from fiduciary obligations, such as warranties, drafting your sale and purchase agreement and fulfilling employee rights.
If you need help understanding your fiduciary duties, contact our experienced business lawyers to assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today at 0800 005 570 or visit our membership page.
Frequently Asked Questions
Fiduciary duties include acting in the best interests of your company, its shareholders and buyers.
During a business sale, you are responsible for fulfilling the warranties provided, drafting a sale and purchase agreement and ensuring all employee rights are met.
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