Minnesota Business Lawyer: Self-Dealing Officers and Directors

Self-Dealing Businessman

Officers and Directors of closely-held corporations are held to a higher standard than many other people. Shareholders in a closely-held corporation are held to a higher standard sometimes also. Shareholders in a publicly-traded corporation are not held to the same standard as those in closely-held corporations.

Fiduciary Duties

Officers and Directors owe duties that we call “fiduciary duties.” A fiduciary duty is a duty owed by one in a position of power or trust. The person is a fiduciary. If Officers or Directors violate these duties the law will hold them accountable.

Minnesota statutes require Directors to engage in their corporate duties in good faith. Minnesota statutes require Directors to do what they think is in the best interest of the corporation. These statutes also require Directors to act reasonably with respect to their corporate duties, in the same manner a reasonable person would if he or she were in a similar position.

Directors in Minnesota owe a duty of care and a duty of loyalty. Most of the actions that violate these duties are not specifically defined. The statutes define general conduct and principles to which Directors must adhere. Officers in Minnesota also owe the same basic duties as Directors, found under separate Minnesota statutes.

An Officer or Director’s Duty of Loyalty

The duty of loyalty encompasses the duty of officers and directors to deal honestly with shareholders. The duty of loyalty also encompasses the duty of officers and directors to act in good faith in their roles as officers and directors. Good faith generally means honest in fact in the conduct concerned.

The fiduciary duties of officers and directors require officers and directors to make disclosures of material information. This includes disclosure of the personal material financial interests of the officers and directors in dealing with the affairs of the corporation. Encompassed in the duty of loyalty is the duty to disclose.

Violations of the duty of loyalty most often arise by self-dealing of officers and directors who are putting their own desires before the interests of the corporation or its shareholders.

An Officer or Director’s Duty of Care

The fiduciary duty of care requires officers and directors to act in the best interests of the corporation. It does not necessarily require that officers and directors’ judgments be sound.

Courts are reluctant to get involved in the business judgments of corporations’ officers and directors, but do require that they act with the intention of satisfying the goals and best interests of the corporation.