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Self-Dealing and The Duty of Loyalty

Business2

If your business is registered as a corporation, one of the requirements is to have a board of directors.  A board of directors is comprised of a group of people who oversee the activities of a company.  The board of directors usually owes certain fiduciary duties to the company, such as the duty of care and the duty of loyalty, which are supposed to ensure the board of directors act in the best interest of the company.  One way in which a director can breach their fiduciary duty of loyalty to a company is by self-dealing.

Self-dealing occurs when a member of the board of directors of a company uses their position as a director to strike a deal that benefits them instead of benefitting the company, or otherwise acts in their own best interests.  A person who self-deals is essentially on both ends of the deal; for example, a director who votes for a company to expand and build more buildings using a certain construction company that they have a financial stake in, knowing that the expansion is not in the company’s best interest.  Self-dealing can be described as a form of conflict of interest.

If a director wishes to engage in a transaction that may be considered to be self-dealing, they may need to recuse themselves from any decisions as a director.  In addition to recusal, the director should fully disclose their connection or interest in the transaction that would constitute self-dealing.  Just because a transaction involves an interested director, does not make it void if the director fully discloses their interests in the transaction, and the transaction is fair to the company in which they are a director.  It is important for a company to remember that the perception of self-dealing can sometimes hurt the company as much as the real thing.  Whenever possible, directors should not be allowed to vote on decisions in which they can be accused of self-dealing.

Sometimes when a court finds that a director has been involved in self-dealing, the court may order that the director’s profits be disgorged, or taken away from the director and paid to the company.  Alternatively, the profits can be placed in a contrastive trust by the court and distributed as the court orders.

A business can institute its own internal rules and policies regarding the duty of loyalty, especially self-dealing.  For example, it could require annual disclosures of financial interests owned in certain industries and companies that the business deals with regularly, or require the disclosure of personal relationships that may lead to the director having an indirect interest in a company.  The policies can also include a penalty for failing to disclose or accurately disclose any applicable interest.

Contact Us for Business Law Assistance

If you are starting a business and need to understand which business type works best for your needs, and what requirements you must meet to start your business in Florida, contact a North Miami business law attorney at the Charlip Law Group L.C. for a consultation today.

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Charlip Law Group L.C.

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