Duty of Loyalty is a term used in corporate law to describe a fiduciary's loyalty to a corporation.
Section 8.60 of Model Business Corporation Act states there is a conflict of interest when the director knows that at the time of a commitment that he or a related person is 1) a party to the transaction or 2) has a beneficial financial interest in the transaction that the interest and exercises his influence to the detriment of the corporation.
It is generally acceptable if a director makes a decision for the corporation that profits both him and the corporation. The duty of loyalty is breached when the director puts their interest in front of that of the corporation.
Conditions of self-dealing transaction
- A key player and the corporation are on opposite sides of the transaction
- The key player has helped influence the corporation's decisions to enter the transaction
- The key player's personal financial interest are at least potentially in conflict with the financial interests of the corporation.
Definition: General duty imposed on a person with power
Ways the proponent of a self-dealing transaction can avoid invalidation
- By showing approval by a majority of disinterested directors
- Showing ratification by shareholders (MBCA 8.63)
- Showing transaction was inherently fair (MBCA 8.61)
See also
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