The Shifting Sands of Conflict of Interest Standards: The Duty of Loyalty Meets the Real World with Questions of Process and Fairness

29 Pages Posted: 4 Dec 2019 Last revised: 17 Dec 2019

See all articles by Stuart R. Cohn

Stuart R. Cohn

University of Florida Levin College of Law

Date Written: 2019

Abstract

Standards governing the validity of conflict-of-interest transactions by corporate directors or others in dominant positions have significantly evolved from the early days of strict judicial condemnation to the current statutory provisions. These provisions place great faith in and emphasis on the judgment of disinterested directors or shareholders. This evolution has not been consistent among states, given that substantial variations exist regarding both statutory provisions and judicial interpretations. To illustrate the variations, this article examines and compares the Delaware and Model Business Corporation Act standards. The variations reflect the concerns that arise when a director’s fiduciary duty of loyalty conflicts with the realities and demands of the commercial world. This article examines the evolution of conflict-of-interest standards and existing variations in light of two fundamental issues: (i) whether the combination of statutory and fiduciary standards obligates directors to obtain advance approval of conflict transactions and (ii) the capacity of shareholders to challenge conflict transactions on the grounds of fairness to the corporation, even after board or shareholder approval. The article concludes that statutory and fiduciary standards obligate directors to obtain advance approval of conflict transactions and provides recommendations for addressing these two issues in a manner consistent with statutory provisions and fiduciary standards.

Suggested Citation

Cohn, Stuart R., The Shifting Sands of Conflict of Interest Standards: The Duty of Loyalty Meets the Real World with Questions of Process and Fairness (2019). 74 Business Lawyer 1077 (2019), University of Florida Levin College of Law Research Paper No. 19-32, Available at SSRN: https://ssrn.com/abstract=3497047 or http://dx.doi.org/10.2139/ssrn.3497047

Stuart R. Cohn (Contact Author)

University of Florida Levin College of Law ( email )

P.O. Box 117625
Gainesville, FL 32611-7625
United States

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