Business partners, officers, and directors of a corporation all owe fiduciary duties of loyalty and good faith to the company and must act in the company’s best interests. Self-dealing occurs when a fiduciary puts their own interests above those of the company to which they owe these duties, resulting in them standing on both sides of a transaction. Although the business judgment rule can help to protect against liability for many actions and decisions made by corporate management, the business judgment does not apply to self-dealing.
What is Self Dealing?
Self-dealing can come in many forms. Specifically, self-dealing can either be direct and benefit the individual committing the act, or it can be indirect — and concern an unrelated third-party. Self-dealing always involves a fiduciary such as a partner, shareholder, director, or officer deriving a personal benefit from a transaction involving the entity to which they owe a fiduciary duty.
Common examples of self-dealing can include:
- Using funds belonging to the company for a personal loan
- Receiving an excessive amount of compensation
- Taking an opportunity that belongs to the company for oneself
- Using insider information in a stock market transaction
- Receiving a kickback for a transaction that involved company assets
Allegations of self-dealing in partnerships and corporations often lead to litigation. When a fiduciary breaches the duty of loyalty, care, or honesty to the corporation, such as in cases involving self-dealing, they may be held liable for monetary damages, including compensatory damages and sometimes, punitive damages. An equitable remedy may also be imposed if the conflict of interest is ongoing — such as an injunction to prevent further transactions of the same type.
Is Self-Dealing Ever Permitted?
Although self-dealing should be avoided altogether, a conflict of interest might not always be grounds for liability. Some situations in which a business partner or shareholder can engage in a transaction involving conflicting business interests and avoid violating their duty of loyalty to the company. For example, if they fully disclosed the business opportunity to the other shareholders before pursuing it — and approval was given— a valid defense to a self-dealing accusation may exist.
A transaction involving self-dealing can also be cured through ratification by disinterested shareholders. Ratification lets approval be given after the transaction has been completed. A transaction might not be self-dealing if the terms of the transaction are fair to the corporation and the other shareholders. While it’s always best to seek approval in advance, liability for self-dealing may be avoided if the company did not forego a benefit due to the fiduciary’s actions — and the value provided to the corporation was reasonable compared with the value gained by the fiduciary.
Contact an Experienced New York Business Law Attorney
If you are facing a commercial dispute involving self-dealing, it’s crucial to consult with an experienced business law attorney who can advise you. Brinen & Associates provides skillful representation for a wide variety of business conflicts, including those involving self-dealing and breach of fiduciary duty matters. Call (212) 330-8151 or send us a message to learn more about how we can help.