Duty of Loyalty: When Self-Dealing Becomes an Issue

Whether you are a director of a corporation or a shareholder in a corporation, it is important to know the duties owed to the corporation by directors. The two main categories of duties owed by directors to the corporation are the duty of care and duty of loyalty. The duty of care refers to the fact that every director is required to be duly diligent in his decisionmaking from his position. Meanwhile, the duty of loyalty refers to the fact that a director must place the best interests of the corporation before his own. This post seeks to explore a very common area where the duty of loyalty becomes an issue: self-dealing.

The duty of loyalty requires that the best interests of the corporation and shareholder take precedence. In essence, the director must exercise independent judgment and must remain disinterested. The most common scenario in which the duty of loyalty is brought into question is self-dealing. Self-dealing refers to instances where the director undertakes transactions in his capacity as director in which he has a stake in the other party with which the corporation is dealing.

There are four common scenarios whereby self-dealing becomes a scenario:

  1.         Transactions between the corporation and the director
  2.         Transactions between the corporation and business entity in which directors or officers have a significant interest
  3.         Transactions between a partially owned subsidiary and parent corporation
  4.         Transactions between a corporation and another corporation with common or interlocking directors or officers.

It is important to note these are just four examples of self-dealing and may occur in other situations. As a shareholder, it is important to know the parameters of when your directors must abide by the duty of loyalty. As a director, is important to know the situations you must avoid in order to not risk violating the duty of loyalty you owe your corporation. If you are in either of these situations and have questions regarding the duty of loyalty, it is in your best interests to consult an experienced legal team that can advise you regarding the duty of loyalty in relation to your corporation. Call the Trembly Law Firm at (305) 431-5678 today to schedule your consultation.