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When Self-Dealing Becomes an Issue in a Parent-Subsidiary Setting

Directors and officers of corporations owe significant duties to the corporation and others within the corporation. Chief among these duties is the duty of loyalty. The duty of loyalty means that directors and officers must place the interests of the corporation ahead of their own. The most common scenario where the duty of loyalty is brought into question is through self-dealing. Self-dealing refers to when the conduct of a fiduciary takes advantage of his position in a transaction and acting for his own interests rather than for the interest of the beneficiary.

One instance where self-dealing becomes an issue is dealing between a parent and subsidiary corporation. In many instances, there are overlapping directors or officers for both the parent and subsidiary corporation. A director, who sits on the board for both the parent and subsidiary corporation, may attempt to engage in transactions between the two corporations. While the intent may not be clear to engage in self-dealing, this is a common example. The reason why this is considered self-dealing is because the director or officer who works within both corporations stands to reap a reward from the transaction taking place. While this form of self-dealing may not be the most potent, it is still often ripe for challenge by the corporation’s shareholders.

There are methods to protect against accusations of self-dealing violating the duty of loyalty. Florida’s Safe Harbor Statute provides that if there is full disclosure and the transaction is approved by a disinterested group of directors or shareholders, it is a permissible form of self-dealing. It is important to realize self-dealing is very rarely dead per se. Rather, it must be proved that the self-dealing was done in the best interests of the corporation. The burden usually lies on the director or officer engaging in the self-dealing to prove it was entirely fair to the organization.

Self-dealing is an all-too-common aspect of being a director or officer for a corporation. It is not always a killer for the director or officer involved, but there is a high level of obligation involved when proving the fairness of the transaction. Consulting with the right legal team can help your corporation realize the next step if a director or officer has engaged in a self-dealing transaction. Call the Trembly Law Firm at (305) 431-5678 today to schedule a consultation.

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