When choosing a trustee, it is important to select an individual who will use good judgment and discretion to administer and manage the trust. The basic duties of the trustee include keeping accurate record, making payments, securing assets, filing tax returns, and defending the trust, among others. In addition to these functions, the trustee has fiduciary duties to administer the trust solely for the benefit of the beneficiaries and to treat each beneficiary fairly and impartially.

The trustee is given the discretion to perform certain duties on his own or to engage agents to carry out trust functions. The trustee has a duty not to delegate responsibilities to other parties that he could reasonably be expected to perform. However, the trustee may delegate actions where warranted under the circumstances. For example, the trustee is obligated to ensure that the trust remains productive by investing assets in income-producing ventures in a timely manner. If the trustee does not have the skill or knowledge to choose investment strategies, he may choose to delegate investment decision powers to a financial adviser. Similarly, the trustee is required to handle all tax-related matters and may elect to hire an accountant to file returns and manage the trust’s tax liabilities. The trustee is obligated to demonstrate care and prudence in selecting agents for these duties. Once the trustee delegates duties, what is his obligation to oversee such activities and what is his liability for the actions of the agents?

Under the law in California, the trustee is required to clearly set forth the conditions and scope of the delegation in accordance with the terms of the trust. The trustee must regularly communicate with third party professionals and review the relevant statements and accounts handled and prepared by them.  In addition, the trustee is responsible for making all decisions regarding distributions of principal or distributions to one or more beneficiaries regardless of the delegation.

If the trustee complies with the requirements of ensuring that agents are performing their duties in accordance with the trust and monitoring the agents’ activities, then the trustee is free from liability to the trust or the beneficiaries for any wrongful actions performed by the agents.    

In a corporation, the managing body has the duty to bring lawsuits on behalf of the corporation and defend the corporation from legal claims. But what happens when a shareholder wants the corporation to pursue a claim and the managing body disagrees? What happens when a shareholder has a claim against one of the corporation’s directors or officers for failing to carry out his or her duties properly or engaging in fraud or self-dealing?

Shareholders can act on behalf of the corporation to bring forth claims or to redress internal misconduct. Known as a derivative action, the shareholder files suit not in his personal capacity, but rather on behalf of the corporation against a third party.  While shareholder derivative suits allow shareholders to step in to initiate litigation when management has not exercised it duty to address the issue, the claim “belongs” to the corporation since the injurious action resulted in damage to the corporation.

Shareholder derivative suits have fairly stringent procedural requirements due to the unusual nature of the action.  In California, before a shareholder can file suit, he is required to make a written demand to the corporation’s Board of Directors (Board) to purse the claims. Only if the Board explicitly refuses to exercise its duty can the shareholder proceed with his claim. The exception to this pre-suit requirement is demonstrating that a demand on the Board would be “futile” because the Board is not capable of seriously considering the shareholder suit due its own self-interest.  The demand requirement is designed to comply with the fundamentals of corporate law: that is, corporate decision making is in the hands of the Board.

The demand on the Board must meet certain standards of particularity; vague allegations of misconduct will be deemed insufficient. The demand must state certain facts such as the identity of the perpetrator of the misconduct, the facts upon which the allegations have been made, and the damages that the corporation has suffered. In addition, the shareholder must offer a written statement of the facts underlying the cause of action or the basis of the complaint. Once these requirements are satisfied, the Board is required to look into credible claims of misconduct.