Duty of Loyalty
Duty of Loyalty
- The Duty of Loyalty is a requirement that a director or officer
must act in the best interests of the corporation. According to Delaware court
rulings, this duty requires that a director "honestly believe that his or
her actions are in the corporation's best
interests."
Conflict of interest transactions are a minefield for breach of the duty of loyalty. Embezzlement and fraud are clear examples of a breach of the duty of loyalty. More common breaches involve approving excessive compensation, approving the purchase, sale or lease of real or personal property to the corporation, using corporate property for personal purposes, improperly loaning funds to the corporation, and improperly borrowing corporate funds. The business judgment rule is not available as a defense to an officer, director, or controlling shareholder with respect to a corporate transaction in which that officer, director, or controlling shareholder has a conflict of interest. The officer, director, or controlling shareholder having the conflict of interest has the burden of proving the transaction's fairness to the corporation. See Business Judgment Rule and Usurping a Corporate Opportunity.
To avoid a breach of the duty of loyalty arising from a conflict of interest in a transaction, a director should not vote at Board meetings on matters in which that director (or a relative or business partner of that director) has a personal financial or other interest. This does not preclude the director from entering into such transactions with the corporation if it is fair and reasonable and has been approved by the rest of the Board of Directors.
Disclaimer: The foregoing is intended to provide general information and may not be suitable in specific instances. The glossary information is not intended to be exhaustive, but rather to illustrate typical considerations. The material is provided with the understanding that it is not legal, accounting, tax or any other professional advice.
Copyright © 2003-2010 LawVantage.com, LLC. All rights reserved.
Important LawVantage.com, LLC and its website, CorporateBoardMinutes.com, do not render any legal, accounting or other consulting advice.
For legal advice, you should always consult with a qualified attorney-at-law.
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Conflict of interest transactions are a minefield for breach of the duty of loyalty. Embezzlement and fraud are clear examples of a breach of the duty of loyalty. More common breaches involve approving excessive compensation, approving the purchase, sale or lease of real or personal property to the corporation, using corporate property for personal purposes, improperly loaning funds to the corporation, and improperly borrowing corporate funds. The business judgment rule is not available as a defense to an officer, director, or controlling shareholder with respect to a corporate transaction in which that officer, director, or controlling shareholder has a conflict of interest. The officer, director, or controlling shareholder having the conflict of interest has the burden of proving the transaction's fairness to the corporation. See Business Judgment Rule and Usurping a Corporate Opportunity.
To avoid a breach of the duty of loyalty arising from a conflict of interest in a transaction, a director should not vote at Board meetings on matters in which that director (or a relative or business partner of that director) has a personal financial or other interest. This does not preclude the director from entering into such transactions with the corporation if it is fair and reasonable and has been approved by the rest of the Board of Directors.
Disclaimer: The foregoing is intended to provide general information and may not be suitable in specific instances. The glossary information is not intended to be exhaustive, but rather to illustrate typical considerations. The material is provided with the understanding that it is not legal, accounting, tax or any other professional advice.
Copyright © 2003-2010 LawVantage.com, LLC. All rights reserved.
Important LawVantage.com, LLC and its website, CorporateBoardMinutes.com, do not render any legal, accounting or other consulting advice.
For legal advice, you should always consult with a qualified attorney-at-law.
Website development by
Vine Design.