Earlier this week, we began discussing how the average shareholder must understand that both the directors they elect to govern the corporation and the officers these directors appoint to run its operations can be held legally accountable for corporate malfeasance — no matter the size of their salary.
To that end, we began discussing how directors and officers owe the shareholders two distinct fiduciary duties, including the duty of care and the duty of loyalty. Having examined the former in our last post, today’s post will take a closer look at how these parties must avoid self-dealing.
Duty of loyalty
At its core, the duty of loyalty requires directors and officers to serve without personal economic conflict in their role as corporate fiduciaries, meaning no taking advantage of corporate opportunities and/or no self-interested transactions.
Directors and officers can be considered to be interested in a particular transaction if the benefit realized devolves primarily to them, rather than to the corporation or the stockholders. In other words, where they appear on both sides of a particular transaction.
Some of the contexts in which potential breaches of the duty of loyalty can occur include:
- Transactions between a parent corporation and subsidiary
- Purchases/sales involving entities in which directors or officers have an interest
- Excessive compensation
- Insider trading
It’s important to understand that in the event a director or officer would like to pursue a particular corporate opportunity or self-interested transaction, the law mandates full disclosure of the details surrounding both the conflict and the deal itself. Furthermore, it must then be approved by a majority of disinterested shareholders or directors, meaning those with no relationship or interest in the transaction.
Here’s hoping the foregoing information has proven helpful. We’ll examine other fiduciary duties owed by directors and officers in future posts.
In the meantime, consider speaking with an experienced legal professional if you are a shareholder who would like to learn more about your options for holding a director or officer liable for corporate malfeasance.