Duty of Loyalty

The duty of loyalty requires an officer or director to act in the best interests of the corporation and not in the person’s own best interest. Several instances may give rise to issues that implicate the duty of loyalty, and an officer or director should be aware of how to handle each of these instances should they arise.

  • An officer’s or director’s conflict of interest may or may not cause the person to breach the duty of loyalty, but the officer or director should always disclose conflicts with other directors. The disinterested directors may elect to allow the corporation complete a transaction where a conflict exists, but the interested director should not take part in this vote.
  • If an officer or director identifies a business opportunity that could benefit the corporation, the officer or director must first allow the corporation to pursue the opportunity before pursuing the opportunity himself or herself.
  • Any transaction that involves a conflict of interest or self-dealing on the part of an officer or director must be fair to the corporation.
  • Any conflict of interest and subsequent actions taken by the board with respect to the conflict must be documented.
  • Corporations should adopt written policies governing conflicts of interest.
  • A corporation should seek independent advice regarding transactions that involve conflicts of interest.

Inside Duty of Loyalty