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Conflicts Of Interest: Self-Dealing

conflicts-of-interest-self-dealing“Almost everyone in politics nowadays has at least one conflict of interest.”

Kenneth Eade

While I’m no fan of Tang the Conqueror1, he’s a constant source of inspiration for our blog posts, for topics ranging from taxes, trusts & estates to general business issues. His recently aborted press conference provided more food for thought, since it was supposed to address how he’d divorce himself from hundreds of businesses – both foreign and domestic – due to conflicts of interest with how he’d run the country.

In business, a conflict occurs when a person’s or organization’s private interests interfere with their loyalty or ability to serve their company. State legislatures and lawyers have dedicated entire sections of law to this topic. They are really boring.

Conflicts occur often and in many companies and industries, so let’s review one of its most common forms and how it can affect businesses, owners and board members.

Self-Dealing and Greed

Though Gordon Gekko famously believed that “Greed is good,” greed can also lead to a person’s or organization’s downfall, as it is often a motivating factor of a conflict of interest. The more technical term for “greed” in these scenarios is “self-dealing.”

Self-dealing commonly occurs when the fiduciary — the director, officer, or controlling shareholder — acts unfairly within his or her own company for personal gain and leads to a disproportionate benefit.

The law does not prohibit these deals, but states:  

Such transactions must be predicated upon:

(i) full disclosure,

(ii) proper approval (or a vote) from disinterested managers and members (or directors and shareholders), and

(iii) fairness to the LLC and its members (or corporation and shareholders).

Although they are often discouraged, if an officer wishes to engage in a self-dealing business opportunity and can present the intentions to other members and receive their approval, the deal can move forward. If full disclosure is not offered, the officer in question could incur penalties, including punitive damages for the unlawful activity.

I often advise clients to avoid self-dealing measures altogether, but if they insist, we will help them “light the lights and follow the formalities.”

More Greed: Insider Trading

It’s extremely important to note that self-dealing with securities is a crime under the Federal Securities Exchange Act. We know this best as “insider trading.”

This occurs when a corporate officer uses nonpublic information to make a trade prior to the information about the company becoming public. If a corporate officer of a company on the brink of a merger buys or sells shares of either companies just before official statements of the merger were made or finalized, that would be an example of self-dealing and/or insider trading. Either way, the Securities and Exchange Commission would sharpen its claws and be out for blood.

A Quick Note For NJ Business Owners

It’s important to note that in New Jersey, a conflict always involves a financial interest. Just do everything in your power to keep everything above-board.

Looking Ahead

I would’ve liked to have heard Pumpkin Spice Mussolini’s own strategy addressing his hundreds of conflicts before he takes office, but we now have to wait until 2017 to get his valuable insight.

All that we know is that he sees no conflict with continuing to executive produce “The Apprentice” during all the downtime the presidency is famous for affording.

When corporate officers mix business and pleasure, there can be consequences. If you have any questions about the obligations of officers and directors to their corporations and to shareholders, contact Brinen & Associates.  Unless you look good in orange.


1 Thank you, Luciana Mallozzi, for your unending source of great monikers for our President-elect, Humpty-Trumpty.

 

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