The Fiduciary Trap: How a Wayward Owner May Abuse their Rights to Drag You and Your Company into Costly Litigation

04/13/2026

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In closely held companies, fiduciary duties operate as the principal checks on owner conduct, forming a governance framework well-suited to the lean, relationship-driven, and often informal way these businesses are run. But the flexibility they afford also carries real risk. Since fiduciary duties involve inherently fact-intensive concerns—turning on intent, context, and the particulars of each interaction—they invite second-guessing after the fact. 

A disgruntled owner may recast a legitimate business judgment as disloyalty or unfair dealing. In this manner, a fiduciary duty claim can turn an ordinary disagreement into a high-stakes, expensive lawsuit, leaving you and your company at the mercy of a judge or arbitrator — and lawyers racking up fees. Even when these claims ultimately fail, they can survive long enough to trigger expensive discovery and motion practice. The result is a familiar dynamic: the merits may eventually be resolved, but only after significant delay and cost.

What should owners do? Approach every decision as if litigation is inevitable, or attempt to contract away fiduciary duties in their operating agreement? The answer lies somewhere in between. Read on to learn why.
 

1. Fiduciary Duties are Flexible Governance Checks.

To understand how these disputes arise, let's start with the dynamics of closely held companies. Ownership is concentrated, control is often individual, and decisions may be made informally, rather than through formal governance structures and strict procedures.

Against this backdrop, owners owe fiduciary duties to both the company and each other. In practice, this means:

• Duty of Loyalty: Owners must act in the company’s best interests and may not advance their own interests at the expense of the business or fellow owners.
• Duty of Care: Decisions should be informed and deliberate; in conflicted situations, this often requires independent input and a process capable of withstanding scrutiny.
• Duty of Candor/Disclosure: Material information must be shared when decisions affect ownership, compensation, or control

These safeguards are inherently fact-driven. When does conduct cross the line into disloyalty? What level of diligence satisfies the duty of care under the circumstances? How much disclosure is enough? What was material to the issue?

Courts often answer these questions by closely examining the context. For example, they may scrutinize whether majority owners exercised their control fairly toward minority owners. In conflicted transactions, they will check for independent review and a demonstrably fair process.
 

2. Fiduciary Duties May Supply a Litigation Weapon.

Closely held companies can involve overlapping owner roles, often with competing interests. There is rarely a clean separation between decision-maker and beneficiary; the same individuals often sit on both sides of a transaction. These dynamics, together with fiduciary considerations, can supply a litigation field day.

 Courts evaluating fiduciary conduct do not focus merely on outcomes—they also assess process: how decisions were made, documented, and carried out. 

Because fiduciary law emphasizes process, disclosure, and fairness, claims can gain traction—particularly where formality is lacking. What felt efficient may later be portrayed as deficient process, giving a dissatisfied owner leverage to assert a claim that will survive dismissal and force costly litigation.

The intrinsically fact-intensive manner by which fiduciary duty claims are evaluated enable a motivated insider to retroactively challenge nearly any company decision. What began as a business disagreement can quickly evolve into something else entirely. 
 

3. Fiduciary Duty Claims Are Easy to Assert in the Private Company Context and Hard to Dismiss at the Outset.

Understandably, many fiduciary duty claims may lack merit yet remain difficult to defeat at the outset, because they are fact-intensive and grounded in equitable considerations.

Against this backdrop, a clear asymmetry emerges in which the plaintiff may have the edge:

• Courts are hesitant to dismiss fiduciary duty claims early, on the pleadings, since questions of fairness, intent, and disclosure typically require a developed factual record. Allegations of self-dealing, conflicted decision-making, or incomplete disclosure are rarely resolved on a motion to dismiss; instead, they open the door to discovery, where the real battle begins.
• Even weak claims can impose significant cost, disruption, and pressure. Once a claim survives the pleadings stage, parties are drawn into document discovery, email review, depositions, and even expert analysis. What may prove to be a weak case can still exact a meaningful toll.
• For a plaintiff, this dynamic can create meaningful leverage. A claim can be initiated with relatively modest upfront burden, particularly under liberal pleading standards, yet still compel a response that is costly and time-consuming. The prospect of prolonged litigation, internal disruption, and mounting legal fees can create pressure to settle—even where the underlying claim is questionable. 
• For a defendant company or co-owner, the consequences are immediate and tangible: cost, distraction, and uncertainty. Management attention is diverted, relationships are strained, and business operations may be impacted. 

Given these dynamics, litigation can be used not merely as a vehicle for legal relief, but as a strategic tool—to gain negotiating leverage, influence control dynamics, or force economic concessions.
 

4. Can Owners Eliminate or Modify Fiduciary Duties? Should They Even Try?

Some owners, confronted with this legal landscape, consider contracting around fiduciary duties. That is, in their operating agreement, they may eliminate or narrow the scope of fiduciary obligations placed on owners under law. 

Can this be done? Well, the answer depends on the governing law.

• In Delaware, the answer is, essentially, yes. The Delaware Limited Liability Company Act expressly permits members to restrict or eliminate fiduciary duties in an operating agreement, subject only to the implied covenant of good faith and fair dealing. Delaware courts have repeatedly enforced such provisions, emphasizing freedom of contract as a core principle. See, e.g., Auriga Capital Corp. v. Gatz Properties, LLC, 40 A.3d 839 (Del. Ch. 2012), aff’d, 59 A.3d 1206 (Del. 2012).
• New York takes a more constrained approach. Although contractual arrangements are respected, courts are generally reluctant to enforce sweeping waivers of fiduciary duties in closely held entities—particularly where doing so would undermine the core expectations of trust among owners. See Pappas v. Tzolis, 20 N.Y.3d 228 (2012). New York courts continue to recognize that owners of closely held companies owe one another heightened duties, often analogized to those among partners. 

Even if it can be done, is it wise? That is an entirely different question. Even when modification is permitted, it is not without cost. Eliminating fiduciary duties among owners can erode trust, invite more aggressive and self-interested conduct, and introduce governance and reputational risks that may ultimately outweigh the intended benefits.

In practice, eliminating fiduciary duties by contract is not a complete solution. It is a tradeoff.
 

Takeaway from the Counsel’s Chair

It does not take clear misconduct to trigger a serious lawsuit. It may take nothing more than a disgruntled owner with an axe to grind—and a compelling narrative.

For private companies and their owners, every significant decision should be made with the awareness that it may later be evaluated by a judge or arbitrator through the lens of fairness, loyalty, and disclosure. These considerations (and, yes, the likelihood of being mischaracterized) should inform decision-making; anticipating retroactive scrutiny simply sharpens that discipline. Viewed realistically, the question is not only whether a decision makes business sense. It is whether, when reframed by a court—or a dissatisfied insider—it can withstand scrutiny. This is a bit like defensive driving. 

The risk is not merely that the decision will be second-guessed—it is that it can be used for a lawsuit. What began as an exercise of business judgment may be reframed as a breach of duty, and once that reframing takes hold, a dispute can shift from commercial disagreement to an expensive fiduciary litigation, with all the cost, disruption, and leverage it entails.