In the context of business law, a conflict of interest generally refers to situations where a person’s own private interests conflict with their professional interests and responsibilities. In most cases, a conflict of interest involves a breach of the person’s duty of loyalty to their corporation or business organization.
A duty of loyalty is a type of fiduciary duty in which a fiduciary, or a person acting on behalf of another to manage their assets, must act in the best interest of the beneficiary. The law requires that they must act in good faith with conscientiousness, fairness, morality, and honesty. This means that the fiduciary may not be involved in any self-dealing transactions, conflicts of interest, or any other abuse for personal advantage.
An example of this would be corporate members who are on the board of directors. They owe their corporation duties of loyalty as fiduciaries, and if they take advantage of certain business opportunities to the detriment of the company, there could be a conflict of interest.
For example, if a board member received a great offer to invest through their work in the company, but did not disclose the investment opportunity first to their company, they may be considered to have conducted in self-dealing and violated their duty of loyalty. A conflict of interest in a business setting may require a person to abstain from participating in certain corporate decisions, as serious conflicts of interest may also lead to legal penalties and consequences.
As previously mentioned, most business law conflicts of interest involve a conflict between a person’s personal interests and their duties to the corporation, partnership, or other type of business entity. Directors, officers, and board members will generally have a higher duty of loyalty to the corporation than other employees or stockholders.
Some of the most common examples of conflicts of interest in a business setting include:
- Self Dealing: Self dealing refers to a director or officer entering into a transaction with another organization that benefits the officer, but to the detriment of the company. These conflicts are sometimes referred to as usurping corporate opportunities;
- Issues with Gifts: There are several business laws in place that prohibit officers from receiving gifts from anyone with whom the company does business. Gifts can include both tangible items and non tangible assets, such as transportation and lodging costs. This is to dissuade bribery;
- Outside Employment Conflicts: If a corporate official is employed with more than one company, business laws state that their interests in one job may not conflict with their interests in the other;
- Confidential Employment Conflicts: Confidential information may not be used for one’s own advantage. Confidential information includes trade secrets, insider trading (when corporate insiders buy and sell stock within the corporation), and securities fraud or other types of securities violations; and
- Family Interests: This is commonly referred to as nepotism. Nepotism occurs when a child, spouse, or other close relative is hired based upon their relation to the director or officer and not because of their qualifications. Family conflict of interests can also involve the unfair distribution of gifts, such as increased salaries and benefits.
Other violations, such as fraud or bribery, are generally considered to be white collar crimes under criminal law. White collar crime deals with crimes committed by individuals in business and government, and are generally non violent in nature. Classifying crimes as conflict of interest will not absolve the guilty parties of criminal fault. In fact, classifying crimes as conflict of interest may lead to other violations under the law.
Once a conflict of interest has been identified, it is best that it is cleared up before any other disputes may arise from it. Additionally, legal consequences may even be avoided if a conflict of interest is resolved through one of the following ways:
- Disclosure: As implied, the director’s conflict of interest must be disclosed before they may serve on the board, or engage in any important decision making processes. This is done in order to help the other directors to understand the person’s overall background and determine how to proceed; or
- Recusal: A person may choose to recuse themselves, which means that they will withdraw from their duties and will not participate in any important decision making processes. They may often remain on the board with limited participation, such as only participating in activities in which they do not have a conflict of interest.
Should the conflict of interest lead to other disputes, these disputes may be remedied by:
- Internal company policies, such as those that deal with dispute resolution through the company’s human resources department;
- Third party involvement, in which a neutral third party may intervene to resolve the conflict or dispute; this may also involve outside reporting to a government regulation agency, such as the Securities Exchange Commission (“SEC”); or
- The director may be sued through a civil lawsuit, in order to determine whether a private deal was fair to the company; if the deal was unfair to the company, the resulting profits may be disgorged, or surrendered to the company.
If you are dealing with a conflict of interest, either your own or someone else’s involved in your company, you may wish to consult with a skilled and knowledgeable business attorney. An experienced business attorney can help you understand if there is in fact a conflict of interest, and your best course of legal action. Additionally, an attorney may represent you in court as necessary.