What is the Duty of Loyalty?

If you are an officer, director or an officer of a company, you know that you have an obligation to the company and its shareholders to do a good job. But your obligations go much farther than that.

The Duty of Care

You generally have two major obligations to the company when it comes to upholding your fiduciary duties to the company and its shareholders.

One is the duty of care. This is a general duty that says that you will exercise due care in the performance of your duties. It doesn’t mean you can’t ever make a wrong choice, or that if the company does poorly you will be blamed.

It simply means that you need to exercise due care, avoid making reckless decisions, and basically “do your homework” when it comes to making corporate decisions for the company.

The Duty of Loyalty

But there is also what is known as a duty of loyalty to the company. .

The duty of loyalty isn’t just about morals or ethics, although that is a large part of the duty.

Those in a fiduciary position to the company (such as owners, managers, directors or higher level corporate officers) have duties to the company that go beyond what an ordinary employee would have. They have a duty to be loyal, even where a “normal” lower level employee would not have such an obligation.

You can, in theory, be doing a super wonderful job, and thus, fulfilling your duty of care, while at the same time and independently, being in breach of your duty of loyalty.

Being Loyal to the Company

The duty of loyalty means what it says—you must put the company first and foremost, and the owners and shareholders of the company, above all other professional interests.

Often, breaches of this fiduciary duty of loyalty come in the form of self-dealing, or usurping of corporate opportunity. But it can also be seen as any action which could lead to a breach of basic trust between the officer or director, and the company.

Often, directors and officers get in trouble, when they make corporate decisions that directly or indirectly benefit them, personally, or benefit family to the financial detriment of the company.

The question in duty of loyalty cases is whether or not there is some interest that the company had, or some benefit that it could have had, which has been lessened, or taken away from, by the breaching officer or director, and whether that officer or director derived some benefit that the company could have or should have had.

Indirect Benefits

The benefit that the officer or director gets, doesn’t have to be a direct benefit for a breach of loyalty to exist.

Imagine for example, a corporate director who knows that he will be switching companies soon. So, while still under the employ of this current employer, he starts making bad decisions, or leaking harmful information to the press, in order to give him and his future employer a tactical business advantage. This would be a clear breach of the duty of loyalty.

Let the West Palm Beach commercial litigation lawyers at Pike & Lustig help you understand your corporate obligations and duties to help you avoid legal problems down the road.

Sources:

lexology.com/library/detail.aspx?g=546c2ad8-a062-4b1a-8b44-0b1650cd7f2a

floridabar.org/the-florida-bar-journal/understanding-fiduciary-duty/