Each member of a corporation’s board of directors owes a fiduciary duty to the corporation and its shareholders. That duty fundamentally has two obligations: the duty of care (directors must perform their jobs diligently and competently) and the duty of loyalty (directors cannot use their positions of trust to further the private interests of any third party – including themselves). Under both these duties, but especially the duty of loyalty, the interests of the corporation and its shareholders must always come first.

As part of the duty of loyalty, directors and officers (as well as controlling shareholders) are required to act with “inherent fairness” to the corporation. That especially relates to any contracts that the board is called upon to approve. It can sometimes be the case that contracts would be between the corporation and one or more individual board members. Any such contract must be fully disclosed and approved by a majority of board members who are not themselves contracting with the corporation. If approval is not given in this way, the contract may be considered void.

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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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