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Business Conflicts of Interest

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What Is a "Conflict of Interest" in Regards to Business Law?

In the context of business law, a Conflict of Interest (COI) doesn’t usually refer to conflicts between two people. Instead, it refers to situations where one person’s own private interests conflict with their professional interests and responsibilities. In most cases, this involves a breach of the person’s duty of loyalty to their corporation or business organization.

For example, corporate members who are on the board of directors owe their corporation duties of loyalty and fiduciary. If they take advantage of certain business opportunities to the detriment of the company, there may be a conflict of interests.

The term “conflict of interest” also arises in many other legal contexts (like when lawyers or judges have a conflict of interest requiring them to abstain from a lawsuit).  In a similar way, a conflict of interests in a business setting might require the person to refrain from participating in certain corporate decisions.  Serious conflicts of interests can also lead to legal penalties and consequences.

What Are Some Common  Conflicts of Interests?

According to business laws, most conflicts of interest involve a conflict between the actor’s own personal interests and their duties to the corporation, partnership, or other type of business entity. Most of the time, directors, officers, and members of corporate boards have higher duties of loyalty to the company than simple stockholders. 

Some common examples of conflicts of interest in a business setting can include:

  • “Self-Dealing”: Self-dealing occurs when a director or officer enters into a transaction with another organization that benefits the officer to the detriment of the company. Conflicts like these are sometimes called “usurping corporate opportunities”
  • Issues with Gifts: Many business laws prohibit officers from receiving gifts from persons with whom the company does business. Gifts include both tangible items and non-tangible assets (like transportation and lodging costs)
  • Outside Employment Conflicts: If a corporate official is employed with more than one company, their interests in one job can’t conflict with those of the other
  • Confidential Information: Confidential information can’t be used for one’s own advantage, especially those relating to trade secrets, insider trading, and other types of securities violations
  • Family Interests: This is where a child, spouse, or other close relative is hired based on their relation to the director or officer. A conflict of interest based on family relations is called “nepotism”, and can also involve unfair distribution of gifts like increased salaries and benefits.   

Note that other violations like fraud or bribery are usually classified under criminal laws as white collar crimes.  In fact, classifying crimes as “conflicts of interests” will not relieve the parties of criminal fault, and can even lead to other violations under the law.

How Are Conflicts of Interest Handled under Business Laws?

It’s usually best if a conflict interest is identified and cleared up before any further disputes arise. A conflict of interests might not lead to legal consequences if they are resolved through:

  • Disclosure: The director’s conflicts of interest must be disclosed before they are allowed to serve on the board or engage in important decision making processes. This will help the other directors to understand the person’s overall background
  • Recusal: If the person does have a conflict of interest, they can “recuse” themselves, which means to withdraw from their duties and not participate in the decision making processes. They can often remain on the board, but their participation may be limited to activities in which they don’t have a conflict

If the conflict of interest does lead to further disputes, these can often be remedied through:

  • Internal company policies dealing with dispute resolution (for example, have the dispute resolved through the company’s human resources department)
  • Third-Party Involvement: A neutral, third party actor can intervene to resolve the conflict or dispute. This will usually involve outside reporting to a government regulation agency like the Securities Exchange Commission (SEC)
  • Private Lawsuits: The individual director may be sued through a civil lawsuit, to determine whether a private deal was “fair” to the company. If the deal was unfair, the profits may be “disgorged” or surrendered to the company

Do I Need a Business Lawyer?

Conflicts of interest in a business setting can often be complex. While they might lead to legal consequences, it is often possible to identify the conflict early on and preserve the employment status of the officer. If you have any questions at all regarding business conflicts of interest, you may wish to contact a qualified business lawyer in your area for advice and representation in a court of law.

Photo of page author Peter Clarke

, LegalMatch Content Manager

Last Modified: 06-19-2014 03:24 PM PDT

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