Dissident Director Who Harms Corporation To Further Personal Objectives Violates Duty Of Loyalty

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I. Director Duty of Loyalty -

Directors owe fiduciary duties to a corporation on whose Board of Directors (“Board”) they serve and effectively to all of its stockholders. The fiduciary duty of loyalty dictates that directors act in good faith and not allow their personal interests to prevail over those of the corporation. Thus, a director may not use confidential company information, or disclose it to third parties, for personal gain without authorization from his fellow directors. This principle is often memorialized in corporate policies.

II. Duty of Loyalty Breached by Leaking Confidential Information -

In Shocking Technologies, Inc. v. Michael, a director (“Michael”) of a privately held Delaware corporation in dire financial straits who was on the Board as the representative of two series of preferred stock, was sued by the corporation for breaching his duty of loyalty by leaking negative confidential information to another preferred shareholder considering an additional investment in the company. The Delaware Court of Chancery found that Michael disclosed the confidential information (i) to encourage the potential investor to withhold funds the corporation desperately needed, thereby making the company accommodating to the governance changes sought by Michael, or (ii) if the investor nevertheless decided to invest, to help the investor get a “better deal” which would include Board representation for such investor (thereby changing the balance of power on the Board in Michael’s favor). In holding that Michael had violated his duty of loyalty, the Chancery Court explained...

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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