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Duty of Loyalty

19 January, 2016 - 16:39

As a fiduciary of the corporation, the director owes his primary loyalty to the corporation and its stockholders, as do the officers and majority shareholders. This responsibility is called the duty of loyalty. When there is a conflict between a director’s personal interest and the interest of the corporation, he is legally bound to put the corporation’s interest above his own. This duty was mentioned in Exercise 3 of Rights of Shareholders when Ted usurped a corporate opportunity and will be discussed later in this section.

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Figure 27.3 Common Conflict Situations 
 

Two situations commonly give rise to the director or officer’s duty of loyalty: (1) contracts with the corporation and (2) corporate opportunity (see Figure 27.3).