Business Conflicts of Interest Laws

A conflict of interest in business law usually refers to a situation where an individual’s private interests conflict with their professional interests and responsibilities. In many cases, the conflict of interest involves a breach of the individual’s duty of loyalty to their business organization or corporation.

What is a Duty of Loyalty?

A duty of loyalty is one of the most important fiduciary duties. A fiduciary refers to an individual who has a legal or ethical relationship of trust with another individual. When an individual has a fiduciary duty to another, they must conduct themselves according to the benefit of the other individual. The individual to whom the duty is owed is often referred to as the principal or beneficiary. A fiduciary often takes care of money or other assets for the beneficiary.

As noted above, the duty of loyalty is extremely important. A fiduciary is expected to act in good faith and wil all fairness, morality, and honesty that the law requires of their position. They cannot be involved in any self-dealing transactions, conflicts of interest, or any other abuses of the principal for any personal advantage.

There are some situations the fiduciary must avoid when making transactions or decisions. These include:

• Not misappropriating business opportunities;
• Not making interested transactions; and/or
• Not breaking the duty of confidentiality.

If a fiduciary manages and protects property and/or assets including money on behalf of a beneficiary for business purposes, they must not seize a business opportunity when acting within the scope of their fiduciary duties. In other words, they cannot seize the business opportunity for their own benefit. They have an obligation to disclose and offer that opportunity to the beneficiary.

If a fiduciary is entrusted with a beneficiary’s property and money, they have a duty to protect and manage it on their behalf. They cannot make interested transactions using that property entrusted to them. They may not sell assets, make any personal profit, or engage in any type of self-dealing transactions using the money or property entrusted to them.

Lastly, a fiduciary has a duty of loyalty that requires them to maintain confidentiality regarding all decisions and private information with which they have been entrusted. A beneficiary may wish to keep certain information private. If that is the case, the fiduciary cannot disclose that information about property or transactions the beneficiary wishes to keep private. The fiduciary must obtain permission to disclose that information.

The duty of loyalty also requires a fiduciary to act in the best interest of the beneficiary. The fiduciary must act in good faith and with conscientiousness, morality, fairness, and honesty. An example of this includes corporate members who are on a board of directors. They owe the corporation a duty of loyalty as fiduciaries. If they were to take advantage of certain business opportunities to the detriment of the corporation, a conflict of interest could exist.

A more specific example of a breach of the duty of loyalty may be if a board member receives an excellent offer to invest through their work in the company, but they do not disclose the opportunity to the company first. This may be considered self-dealing.

Conflicts of interest in business settings may require an individual to abstain from participation in certain corporate decisions. Serious conflicts may lead to legal penalties and consequences.

What Are Some Common Examples of Business Conflicts of Interest?

In most cases, a business law conflict of interest involves a conflict between an individual’s personal interests and their duties to the corporation, partnership, or other type of business entity. In most cases, directors, officers, and board members have a higher duty of loyalty to the corporation than other employees and/or stockholders.

The most common examples of conflicts of interest in business settings include:

• Self-dealing;
• Receiving gifts;
• Outside employment conflicts;
• Confidential employment conflicts; and/or
• Family interests.

Self-dealing refers to a situation where a director or officer enters into a transaction with another organization that benefits the officer, but to the detriment of the company. This is sometimes referred to as usurping corporate opportunities.

Some business laws prohibit officers from receiving gifts from anyone with whom their company does business. Gifts may be tangible items or non-tangible assets, such as covering costs or transportation or lodging. This is to help discourage bribery.

An outside employment conflict may occur if a corporate official is employed with more than one company. Business laws require that their interests in one job cannot conflict with interests in their other job.

A confidential employment conflict may occur because an individual cannot use confidential information for their own advantage. Confidential information can be trade secrets, insider trading, and/or securities fraud or another type of securities violation.

Nepotism, or family interests, occurs when a child, spouse, or other close relative is hired based only upon their relation to the officer or director and not because of their qualifications. Family interests conflicts may also involve the unfair distribution of gifts, including increased salaries and/or benefits.

Other violations, including fraud or bribery, are considered white collar crimes in criminal law. White collar crimes are generally non-violent in nature and involve individuals in business and government. Classifying a crime as a conflict of interest will not absolve an individual from criminal fault. It may, in fact, lead to other violations of the law.

How Do Business Laws Handle Conflicts of Interest?

In conflict of interest cases, once a conflict has been identified, it is important to resolve the dispute before any others arise from it. It may be possible to avoid legal consequences should a conflict of interest be resolved through disclosure and/or recusal.

Disclosure requires a director’s conflict of interest to be disclosed prior to serving on the board and/or engaging in any important decision making process. Disclosure helps the other directors understand the individual’s background and determine how best to proceed.

Recusal occurs when an individual recuses themselves, or withdraws from their duties, and does not participate in an important decision making process. They may remain on the board with limited participation, which may mean only participating in activities where they do not have a conflict of interest.

If the conflict of interest leads to other disputes, the disputes may be remedied in several ways, including:

• Internal company policies, including those that handle dispute resolution through the company’s human resources department;
• Involvement of a neutral third party to intervene and resolve the conflict, which may involve outside reporting to a government regulation agency such as the Securities and Exchange Commission (SEC); and/or
• A civil lawsuit against the director to determine whether or not a private deal was fair to the company.

Do I Need an Attorney for Help Resolving a Business Conflict?

If you are dealing with a conflict of interest, either as an individual that may have one, or an attempt to resolve an issue, an experienced commercial lawyers will be able to help. A lawyer can review the circumstances and determine if there is, in fact, a conflict of interest. A lawyer can determine the best course of action and represent you during any court proceedings, if necessary.

You may also consult with a business lawyer prior to conducting business deals if needed. If you have any questions or hesitations whether or not your actions may constitute a conflict of interest, a business lawyer will be able to review the facts and advise you whether or not to move forward.