The duty of loyalty is often called the cardinal principal of fiduciary relationships, but is particularly strict in the law of

trusts A trust is a legal relationship in which the holder of a right gives it to another person or entity who must keep and use it solely for another's benefit. In the Anglo-American common law, the party who entrusts the right is known as the "settl ...

. In that context, the term refers to a

trustee Trustee (or the holding of a trusteeship) is a legal term which, in its broadest sense, is a synonym for anyone in a position of trust and so can refer to any individual who holds property, authority, or a position of trust or responsibility to t ...

duty A duty (from "due" meaning "that which is owing"; fro, deu, did, past participle of ''devoir''; la, debere, debitum, whence "debt") is a commitment or expectation to perform some action in general or if certain circumstances arise. A duty may ...

to administer the

trust Trust often refers to: * Trust (social science), confidence in or dependence on a person or quality It may also refer to: Business and law * Trust law, a body of law under which one person holds property for the benefit of another * Trust (bus ...

solely in the interest of the

beneficiaries A beneficiary (also, in trust law, '' cestui que use'') in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor. For example, the beneficiary of a life insurance policy is the perso ...

, and following the terms of the trust. It generally prohibits a trustee from engaging in transactions that might involve

self-dealing Self-dealing is the conduct of a trustee, attorney, corporate officer, or other fiduciary that consists of taking advantage of their position in a transaction and acting in their own interests rather than in the interests of the beneficiaries of ...

or even an appearance of

conflict of interest A conflict of interest (COI) is a situation in which a person or organization is involved in multiple interests, financial or otherwise, and serving one interest could involve working against another. Typically, this relates to situations i ...

. Furthermore, it requires a fiduciary to deal with transparency regarding material facts known to them in interactions with beneficiaries. Duty of loyalty in corporation law to describe a fiduciary's "conflicts of interest and requires fiduciaries to put the corporation's interests ahead of their own."''Corporations.'' Fifth Edition. Examples and Explanations. Alan R. Palmiter. ASPEN. New York. p. 192. "Corporate fiduciaries breach their duty of loyalty when they divert corporate assets, opportunities, or information for personal gain." 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 his or her interest in front of that of the corporation.

Conditions of self-dealing transaction

* ''Flagrant Diversion'': corporate official stealing tangible corporate assets - "a plain breach of the fiduciary's duty of loyalty since the diversion was unauthorized and the corporation received no benefit in the transaction." * ''Self-Dealing'': A key player and the corporation are on opposite sides of the transaction or the key player has helped influence the corporation's decisions to enter the transaction. "When a fiduciary enters into a transaction with the corporation on unfair terms, the effect is the same as if he had appropriated the difference between the transaction's fair value and the transaction's price." *''Executive Compensation'' *''Usurping

Corporate Opportunity The ''corporate opportunity'' doctrine is the legal principle providing that directors, officers, and controlling shareholders of a corporation must not take for themselves any business opportunity that could benefit the corporation. The corporate ...

'' *''Disclosure to Shareholders'' *''Trading on Inside Information'' *''Selling out'' *''Entrenchment'' * The key player's personal financial interest are at least potentially in conflict with the financial interests of the corporation.

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)

U.S. Model Business Corporation Act

Section 8.60 of the

Model Business Corporation Act The Model Business Corporation Act (MBCA) is a Model Act promulgated and periodically amended by the Corporate Laws Committee of the Business Law Section of the American Bar Association (Committee). The MBCA had been adopted by 36 states and other ...

states there is a

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.

References

Corporate law {{law-term-stub

Conditions of self-dealing transaction

Ways the proponent of a self-dealing transaction can avoid invalidation

U.S. Model Business Corporation Act

See also

References