Directors

• A corporation is owned by its shareholders. However, shareholders generally do not take an active hand in overseeing the corporation. Shareholders elect a board of directors to represent their interests in the operation of the company. A board of directors supervises corporate management and approves significant decisions and transactions on behalf of the corporation. In the wake of Sarbanes-Oxley, the board is generally responsible for approving the corporation's accounting as well.
  
  

Duty of Loyalty

• Under common law, directors owe a duty of loyalty to the corporation. This duty of loyalty prohibits the director from profiting at the corporation's expense. Breach of the duty of loyalty gives shareholders a right to legal redress. State corporate statutes generally have their own interpretations of the directors' duty of loyalty and what constitutes breach, but most statutes have many general elements taken from common law.
  
  

Conflict Transaction

• A conflict-of-interest transaction generally arises when the director (or a related person of whom the director is aware) acts as a party to or has a financial interest in a transaction, such that that interest would influence his vote on the transaction. Conflict also exists automatically when one director sits on the boards of two different companies which are transacting with each other. While a director may be present at a board meeting where directors vote on such an interested transaction, he may not vote on the transaction himself and must abstain.
  
  

Corporate Opportunity Doctrine

• Under the corporate opportunity doctrine in common law, should a director discover a business opportunity for the corporation, he must present that opportunity to the corporation and give the corporation a chance to take advantage of it before he takes the opportunity himself. This doesn't apply to all business opportunities, only those in which the corporation has a reasonable interest or expectation based on the corporation's line of business. The director must still present the opportunity to the corporation, even if the corporation probably does not have the financial means to take advantage of it.
  
  

Curing Conflict

• State statutes differ on methods of curing a conflict of interest transaction, i.e., making the transaction legally acceptable despite the director's interest. However, most states set forth one of three general mechanisms for curing the conflict after the corporation has been informed: approval of the transaction by a majority of the directors who have no interest in the transaction, approval of the transaction by a majority of non-interested shareholders entitled to vote upon it, or if the transaction, all circumstances considered, was "fair" to the corporation. Fairness of transactions is a fact-intensive analysis made by courts.