Duty of loyalty

Definition

The duty of loyalty stands for the principle that directors and officers of a corporation in making all decisions in their capacities as corporate fiduciaries, must act without personal economic conflict. The duty of loyalty can be breached either by making a self-interested transaction or taking a corporate opportunity.

See: Self-dealing.

See: Corporate opportunity.

In order to prevent a violation of the duty of loyalty, if a fiduciary wishes to make a self-interested transaction, or take a corporate opportunity, the fiduciary must first fully disclose both the facts of the conflict, and the details of the transaction. The transaction must then be approved by either a majority of disinterested directors or a majority of disinterested shareholders.

If the duty of loyalty is found to be violated, courts may order the offending fiduciary to pay restitution, and may impose punitive damages to deter future violations.

See also