What is a Duty of Loyalty?

The duty of loyalty is one of the primary fiduciary duties for the board of directors of a company that requires them to ensure all the decisions are taken in good faith and in the best interest of the shareholders.

How Does the Duty of Loyalty Work? 

The duty of loyalty makes sure a director is completely loyal to the company’s interest. They must always act without conflicts of any economic interests and should not take advantage of a corporate opportunity for personal gain. Breaching the terms of duty of loyalty may attract a lawsuit resulting in fines and paying compensations. The duty of loyalty also requires them to keep the company’s confidential information private. The directors may come across a confidential information in their official capacity as a director of the company, but they must not use that information for personal gain. They also must not disclose that information in public. They need to report all the existing or potential conflict of interests to the Board of Directors, and if the matter is unclear, they must seek legal advice. If there is a conflict of interests, the directors need to come clean and reveal all the information deemed relevant. The three main components of duty of loyalty are, avoiding transactions between the corporation and a third party that benefits the directors and not the company, avoiding taking any corporate opportunity for personal gain and keeping the confidential information private.