Self-dealing can arise in any business, including startups, large corporations, and family-owned companies. Self-dealing is not only a conflict of interest, but also a breach of fiduciary duty that can erode trust, cause significant financial loss, and lead to serious legal consequences. Depending on the facts of the case, criminal charges may even be brought. It’s important to be aware of how to avoid these types of transactions in order to protect your company’s bottom line and reputation.
What is Self-Dealing?
Self-dealing occurs when a corporate officer, director, or shareholder uses their position at a company to benefit themselves, rather than act in the best interests of the business. Simply put, it occurs when a party with a fiduciary duty toward the company puts their own interests ahead of the company’s.
Common examples of self-dealing can include the following:
- Using company funds for personal expenses
- Learning of a business opportunity and using it for personal gain, rather than for the benefit of the company
- Using non-public information about the company to buy or sell stock for personal gain
- A partner awarding contracts to businesses they own or have a stake in
- Inflating one’s own salary or paying oneself an unreasonably high bonus without authorization
- Receiving kickbacks for transactions involving company assets
Notably, while the business judgment rule can help protect corporate management from liability for many actions, it does not apply to self-dealing.
Is Self-Dealing Ever Permitted?
If you’re a business partner, director, or shareholder, it’s best to avoid engaging in conflicts of interest altogether. However, there are certain situations where a conflict of interest may be permitted. For instance, if a shareholder fully discloses a business opportunity that would be a conflict of interest before pursuing it — and disinterested shareholders approved the action — a valid defense may exist against allegations of self-dealing.
Self-dealing can also be cured through ratification. This involves obtaining approval from disinterested business partners or shareholders after the transaction has taken place. Nevertheless, it’s important to understand that there are limitations to ratification, and it should not be relied upon as a solution. Ratification will be ineffective if it is later proven that a transaction was unfair or fraudulent.
What Can You Do if Self-Dealing is Harming Your Company?
Self-dealing can have a substantial economic impact on a company — and the party who breached their fiduciary duty by engaging in a conflict of interest may be held liable for the harm they caused. While claims involving breaches of fiduciary duty can sometimes be resolved out of court by using a method of alternative dispute resolution, such as mediation or arbitration, litigation is necessary in many cases.
If self-dealing is proven in court, a judge may order compensatory damages for financial losses, disgorgement of profits, or a constructive trust. They may also issue an injunction to prevent the party from further harming the company. If continuing the business relationship would be impractical or impossible due to the self-dealing, a business partner may be entitled to request that the court dissolve the company.
There are several measures a business owner can take to help safeguard their company from instances of self-dealing before they arise. Importantly, businesses should establish clear conflict of interest policies that require full disclosure of personal or financial interests in corporate transactions. It’s also crucial to define fiduciary duties in formal agreements and keep thorough records of all business transactions — especially those that involve a potential conflict of interest. A skillful business attorney can best advise you regarding the proactive measures necessary to shield your business from self-dealing.
Contact an Experienced New York Business Attorney
Self-dealing is a serious issue that can undermine the integrity of your business, expose your company to risk, and dilute shareholder equity. At Barnes & Barnes, P.C., we offer high-quality legal services and reliable representation for a wide range of commercial disputes on Long Island — including those involving self-dealing and breaches of fiduciary duty. Contact us at (516) 673-0674 to schedule a consultation to learn how we can help.
