Directors of a corporation are expected to honor their fiduciary duties of loyalty and care at all times. Part of remaining loyal to a corporation is acting in the corporation’s best interests at all times. In addition, it also requires acting in good faith. When there are issues of loyalty, they are likely to involve conflicts of interest.
There is the potential that a conflict of interest arises at any time when a director of a company or corporation is presented with an opportunity. Many of these opportunities presented to a director are not actually conflicts of interest but there is still the potential. When the opportunity presented to the director is presented to the director in his or her personal capacity and not in the capacity as a member of a board of directors, the possibility of a conflict of interest increases dramatically.
As in all things, there are a couple of different types of conflicts of interest in the corporate capacity. For there to be any conflict of interest, the opportunity presented to the director must become a corporate opportunity. To be this, the opportunity presented must be 1) in the same line of business as the corporation or 2) in an area where a corporation has an interest or expectancy in the opportunity. When these criteria are met, there is a conflict of interest if the director takes the opportunity.
There are times even when a director that takes an independent contractor position can actually be presented with a conflict of interest. This occurs if the director’s other company or corporation contracts with the corporation. If the director has a “material financial interest in the transaction” then it is likely that there is a conflict of interest.
In this type of scenario, the director is not necessarily on both sides of the deal but will still get money if a certain event occurs. A financial interest in the deal is not enough; it must be material. This is a facts-based sliding scale that a court or judge will look into to determine if the financial interest reaches the levels of material.
Other than a material financial interest in the transaction, the director may be in a position to sell a piece of property or an idea to the corporation for financial gain. This puts the director on both sides of the transaction equation and could potentially be a problem. This situation could be a problem any time it occurs.