Which statement about the duty of loyalty and self-dealing is correct?

Which statement about the duty of loyalty and self-dealing is correct?

• A. Directors may engage in self-dealing if it benefits the company.
• B. Self-dealing must be fair and reasonable or disclosed to the board and approved by a quorum of disinterested directors.
• C. Directors may compete with the corporation if they inform the board.
• D. The duty of loyalty requires that directors always vote with the majority of shareholders.

Answer: (B)

Directors must avoid self-dealing; a transaction between the corporation and a director or related party is scrutinized to protect the duty of loyalty. It’s permitted only if the deal is fair and reasonable to the corporation, or if full disclosure is made to the board and the transaction is approved by a quorum of disinterested directors (often interpreted as directors free of the conflict). This safeguards the corporation from biased decisions that could harm it while still allowing legitimate related-party arrangements when proper safeguards are in place. In contrast, allowing self-dealing merely because it benefits the company is not correct, since a director’s personal interest creates a conflict. Competing with the corporation isn’t cured by informing the board, because loyalty to the corporation still forbids undermining it. And voting with the majority of shareholders isn’t the controlling rule—the director’s duty is to the corporation, not to merely follow the majority.

Directors must avoid self-dealing; a transaction between the corporation and a director or related party is scrutinized to protect the duty of loyalty. It’s permitted only if the deal is fair and reasonable to the corporation, or if full disclosure is made to the board and the transaction is approved by a quorum of disinterested directors (often interpreted as directors free of the conflict). This safeguards the corporation from biased decisions that could harm it while still allowing legitimate related-party arrangements when proper safeguards are in place.

In contrast, allowing self-dealing merely because it benefits the company is not correct, since a director’s personal interest creates a conflict. Competing with the corporation isn’t cured by informing the board, because loyalty to the corporation still forbids undermining it. And voting with the majority of shareholders isn’t the controlling rule—the director’s duty is to the corporation, not to merely follow the majority.