Limiting Fiduciary Duties in Minnesota Small Businesses

Minnesota business owners in a partnership may desire to limit the fiduciary duties they owe each other. They may ask their lawyer to draft a partnership agreement providing limitations on their duty to disclose to each other. They may also ask their lawyer to include a provision allowing the partners to compete with the partnership.

The rationale for such provisions may be based on the fact that the partners already compete, but they want to have a partnership together without the fiduciary duties that are usually imposed on partners because those duties would impede their other businesses. But are such fiduciary duty limitations enforceable?

Example of Limiting Fiduciary Duties

The issue may more easily be understood with a short example:

Imagine that Sue owns a gift shop, and across the street, Jenny owns a gift shop. The two shops compete. One day, Jenny learns that space in a shopping center one block away is available for rent. Jenny can’t afford to rent the space alone, so Jenny asks Sue if Sue would be interested in going into a partnership with Jenny by starting a gift shop in that space. In short, Jenny and Sue agree that they will start a new gift shop together as well as continue to run each of their individual gift shops. Jenny and Sue also decide to make Terrence an owner in their business because Terrence is willing to help fund the operation.

They all agree that since Jenny and Sue have existing gift shops in competition with each other, they don’t want to owe each other the default fiduciary duties. That is, Jenny and Sue want to allow competition with their jointly owned business rather that being bound by the duty not to usurp a partnership opportunity. Also, Jenny and Sue don’t want the duty to disclose business opportunities to each other. The question is whether Jenny and Sue can effectively limit these fiduciary duties that they would normally owe each other.

This question was recently considered by the Eighth Circuit Court of Appeals in Triple Five of Minn., Inc. v. Simon, 404 F.3d 1088 (8th Cir. 2005) (PDF) (HTML) and anayzed in a recent law review article, Unenforceable Fiduciary Duty Limitations: Why Drafting Partnership Agreements Limiting the Duty to Disclose and Partnership Opportunity is More Precarious After Triple Five of Minn., Inc. v. Simon, 404 F.3d 1088 (8th Cir. 2005), 33 William Mitchell Law Review 1483 (2007). The district court’s decision is available at Triple Five of Minnesota, Inc. v. Simon, 280 F. Supp. 2d 895 (D. Minn. 2003).

In short, the article states that, under Minnesota law, a lawyer could carefully draft narrow and specific fiduciary duty limitations that would probably be enforceable, but broad fiduciary duty waivers certainly are not enforceable.

The first half of the article reviews the history of fiduciary duty limitations in Revised Uniform Partnership Act and the recent Minnesota case, Triple Five of Minn. Inc. v. Simon case, where the court held that a broad fiduciary duty waiver was not enforceable. The article then considers other related cases.

Most useful to Minnesota business lawyers will be the final part of the law review article, which provides practical advice for Minnesota business lawyers seeking to draft agreements that limit fiduciary duties.

To learn more about fiduciary duties in Minnesota partnerships, you might be interested in reading the following:

Leave a Public Comment