Directors’ Duty of Loyalty

In this post, I discuss the directors’ duty of loyalty to the company they manage and how this may interact with potential legal liabilities.

As I discussed in a previous post, there is a division between directors and shareholders within a corporation. The directors are responsible for running the business and in almost all circumstances may make decisions without the approval or consent of the shareholders—except where provided in the corporation’s bylaws. The shareholders own the corporation, but their influence is limited to their ability to name the directors.

Protecting the Shareholders

Recognizing the relative disadvantage of the shareholders, the law imposes various duties upon directors to ensure that they act in the best interest of the corporation and, by extension, the shareholders. That is to say that directors cannot use their position to enrich themselves at the expense of the shareholders.

This is generally referred to as the duty of loyalty.

The Duty of Loyalty

The duty of loyalty states that the directors may not act where there is a conflict of interest. That is, a director—or a member of his family—cannot be on one side of the contract where the corporation is on the other side. Allowing this would provide too great an opportunity for a director to use his position to make deals that benefit him personally at the expense of the corporation.

Conflicts of interest are not, however, always impermissible. Under the safe-harbor framework codified in Delaware General Corporation Law § 144 and reflected in the Model Business Corporation Act, a conflicted transaction does not run afoul of the director’s duty of loyalty if any one of the following circumstances is present:

1. The material facts of the conflict and the deal were disclosed and the transaction was approved in good faith by a majority of the disinterested directors—a number that, under DGCL § 144(a)(1), must be at least two.
2. The material facts were disclosed and the transaction was approved in good faith by the shareholders entitled to vote on it.
3. The transaction was fair to the corporation at the time it was authorized.

(Delaware substantially amended § 144 in 2025 to clarify and codify these standards; the basic three-pronged structure remains. Other jurisdictions track the Model Business Corporation Act, which uses similar but not identical procedures.)

Corporate Opportunity Doctrine

The Corporate Opportunity Doctrine exists within the director’s wider duty of loyalty. Under the foundational case Guth v. Loft, Inc., 5 A.2d 503 (Del. 1939), a corporate officer or director may not personally take advantage of a business opportunity if:

1. The corporation is financially able to exploit the opportunity;
2. The opportunity is within the corporation’s line of business;
3. The corporation has an interest or expectancy in the opportunity; and
4. By taking the opportunity for his own, the director or officer will thereby be placed in a position inconsistent with his duties to the corporation, particularly his duty of loyalty.

A director or officer may, however, take a corporate opportunity if:

1. The opportunity is presented to the director or officer in his individual and not his corporate capacity;
2. The opportunity is not essential to the corporation;
3. The corporation holds no interest or expectancy in the opportunity; and
4. The director or officer has not wrongfully employed the resources of the corporation in pursuing or exploiting the opportunity.

Duty of Loyalty In Sum

The duty of loyalty that the law imposes on a corporation’s directors helps to protect shareholders against the exploitative behavior of unscrupulous corporate insiders. The duty of loyalty also imposes some requirements of which a director may unintentionally run afoul, so a proper understanding of the law’s requirements is critical for anyone taking on a position of leadership within a company, particularly those who may serve on a board of directors that meet only a few times per year.

Disclaimer: This post is for informational purposes only and is not legal advice. Corporate fiduciary law is largely a matter of state law and varies significantly across jurisdictions. Consult a qualified attorney for any specific corporate-governance question.

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