Duty Of Loyalty

What is the duty of loyalty?

The duty of loyalty is the fiduciary responsibility of the Officers and executives of a corporation, that requires them to 1) act in the best interests of the corporation and its shareholders; 2) avoid putting their own interests ahead of the company. Typically, Officers of the company must disclose any potential conflicts of interest to the board and shareholders as soon as they are uncovered.  A breach of the duty of loyalty occurs when a director or executive uses their position of power for personal gain or for personal benefit at the expense of the company. 

Officers who violate their duty of loyalty can be held liable for damages caused to the company. They may also be subject to suit by the shareholders of the company for breaching their fiduciary responsibilities.

Who is subject to the duty of loyalty?

The fiduciary duty of loyalty applies to the Officers of a company, the individuals who are responsible for making decisions on behalf of the company, and those who have fiduciary duties to the company. All directors, regardless of their level of authority or d decision-making power are subject to the fiduciary duty of loyalty.

What are the key components of the duty of loyalty?

There are three key components of the duty of loyalty:

• They must keep information confidential: Officers must keep information about the company confidential and not use it for their own personal gain. This includes information about the company's finances, operations, and strategies.
• They must avoid conflicts of interest: Officers must avoid any conflicts of interest that might benefit them more than the company. This includes self-dealing transactions and any other transaction where the individual has a personal interest.
• They must not misuse their position for personal gain: Usurping a corporate opportunity, self-dealing, or insider trading are all examples of how Officers may misuse their power.

Example of a breach of the duty of loyalty?

Let's say an Officer of a pharmaceutical company finds out that the company's most promising new drug is about to be approved by the FDA. The director then buys shares of the company's stock, knowing that the stock price will go up when the news is announced. This would be an example of insider trading, which is a violation of the duty of loyalty.

In a similar example, let's say the Officer finds out that the drug failed to achieve FDA approval. They decide to sell and short the stock the day before the news is made public. This is also an example of insider trading, and is a violation of the duty of loyalty.

In both examples, the Officer put their financial interests ahead of the interests of the company and its shareholders, resulting in a breach of the duty of loyalty.

Duty of loyalty vs the duty of care

The duty of loyalty and the duty of care are two important fiduciary duties that the Officer of a company is subject to. While the duty of loyalty requires a director to act in the best interests of the company and its shareholders, the duty of care requires a director to exercise a reasonable degree of care when making decisions on behalf of the company.

The duty of loyalty is more expansive than the duty of care, as it includes duties such as confidentiality and disclosure of conflicts of interest. The fiduciary duty of care is narrower in scope and only requires Officers to exercise a reasonable degree of care when making decisions on behalf of the company. However, the duty of care doesn't solely apply to fiduciaries and can apply to any individual in a position of power.

The fiduciary duty of loyalty is more likely to be breached when an Officer puts their own interests ahead of the company's, while the fiduciary duty of care is more likely to be breached when an Officer makes careless decisions that cause harm to the company.

Both fiduciary duties are important, and Officers must be aware of both when making decisions on behalf of the company. Violating either one can lead to personal liability for damages caused to the company. It is important for Officers to be aware of both duties and to make sure that they are acting in the best interests of the company at all times.

What happens if someone breaches the duty of loyalty?

If an Officer breaches their fiduciary duty of loyalty, they can be held liable for damages caused to the company. This includes losses suffered by the company as a result of the breach, such as profits that were lost or damage to the company's reputation. In addition to their employment being terminated, the Officer may also be subject to restitution (a sum of money that is paid to make up for any losses that were incurred) and criminal charges. 

It is important for Officers to understand their fiduciary duties and to act in the best interests of the company at all times. Failing to do so can lead to serious consequences, including financial losses and personal liability.