duty of loyalty

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The duty of loyalty is one of the fiduciary duties owed by a company’s directors . The duty of loyalty requires the directors to place the interests of the company and the shareholders before any of their personal interests. The directors’ actions such as diverting corporate assets, opportunities, or information for personal gain can certainly violate their duty of loyalty. Additionally, the duty of loyalty can be also violated when a director usurps a corporate chance by taking advantage of information valuable to the company and instead gains profits from it for personal benefits.

In addition, the duty of loyalty places additional responsibilities upon the directors. For instance, the directors are required to keep confidential, but not to disclose or misuse any information that they receive in their capacity as directors. Also, the directors need to report every conflict of interest no matter whether real or perceived, to the company. In the cases where conflicts do exist, the directors should disclose all relevant information.

To avoid violations of the duty, the directors are supposed to disclose personal conflicts they may have to the board of directors so that a disinterested vote could be taken without them. Directors are also supposed to be prepared to present any opportunities relevant to the corporation to the board before trying to benefit from them.

[Last updated in July of 2022 by the Wex Definitions Team]