What is a Breach of the Duty of Loyalty?

The relationship between an officer or director and a corporation gives rise to certain fiduciary obligations as a matter of law. One of the fiduciary duties that an officer or director owes the corporation is a duty of loyalty. The duty of loyalty requires every officer or director to act in good faith and with a reasonable belief that what he or she does is in the corporation’s best interest.

A classic example of a breach of the duty of loyalty is where a director profits at the corporation’s expense, meaning that a director acts in furtherance of his or her own personal financial interests, separate business interests, or a family member’s business.  If the corporation loses money as a result of a transaction in which the officer or director has a personal interest, that director could be found liable for the corporate losses.  However, even if there is no loss to the corporation (for example, if the corporation could not have gotten a better price), the officer or director may still be forced to disgorge any profits (i.e., give them to the corporation).

Where an officer or director’s actions are in furtherance of the corporation’s businesses, and he or she has no connection to any personal interests tied to the corporate transaction, there is usually little to no risk of a breach of the duty of loyalty.  Similarly, an officer or director with a personal financial interest may disclose that fact to the corporation and seek the approval of the transaction by disinterested members of the board.  Assuming that a full disclosure was made and board approval was obtained, there would likewise be little to no risk of a breach of fiduciary duty.

Another part of the duty of loyalty comes into play where an officer or director plans to terminate their employment and join a competing company or venture.  In the absence of an agreement to the contrary, a director may engage in competition with the corporation after termination of his or her directorship relationship. However, before planning or deciding to compete with the corporation, whether before or after deciding to leave, an officer or director should consult with an attorney to determine the scope of any noncompetition or nonsolicitation clauses in their employment agreements.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business and property claims. Contact us at (310) 277-7747 to see how we can help you with your business law concerns.

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