Duty of Loyalty (Directors) – Definition

Cite this article as:"Duty of Loyalty (Directors) – Definition," in The Business Professor, updated November 23, 2018, last accessed October 29, 2020, https://thebusinessprofessor.com/lesson/duty-of-loyalty-explained/.


Duty of Loyalty Definition

The duty of loyalty is one of the primary fiduciary duties for the board of directors of a company that requires them to ensure all the decisions are taken in good faith and in the best interest of the shareholders.

A Little More on the Duty of Loyalty

The duty of loyalty makes sure a director is completely loyal to the company’s interest. They must always act without conflicts of any economic interests and should not take advantage of a corporate opportunity for personal gain. Breaching the terms of duty of loyalty may attract a lawsuit resulting in fines and paying compensations.

The duty of loyalty also requires them to keep the company’s confidential information private. The directors may come across a confidential information in their official capacity as a director of the company, but they must not use that information for personal gain. They also must not disclose that information in public.

They need to report all the existing or potential conflict of interests to the Board of Directors, and if the matter is unclear, they must seek legal advice. If there is a conflict of interests, the directors need to come clean and reveal all the information deemed relevant.

The three main components of duty of loyalty are, avoiding transactions between the corporation and a third party that benefits the directors and not the company, avoiding taking any corporate opportunity for personal gain and keeping the confidential information private.

References for the Duty of Loyalty


Academic Research on Duty of Loyalty

¬∑¬†¬†¬†¬†¬†¬† Re-examining legal transplants: The director’s fiduciary¬†duty¬†in Japanese corporate¬†law, Kanda, H., & Milhaupt, C. J. (2003). The American Journal of Comparative Law,¬†51(4), 887-901. The transplantation of legal rules from one country to another is commonly observed around the world. Yet, there is little academic understanding of how feasible these transplants are, how successful they can be, or how they impact the broader economy. The Japanese legal system comprises large scale legal transplants, especially rules governing economic organization. This article seeks to explain the role of legal transplants in corporate law by examining the director‚Äôs duty of loyalty rule, which was transplanted from the United States to Japan in 1950.

¬∑¬†¬†¬†¬†¬†¬† Questioning the trust law¬†duty¬†of¬†loyalty: Sole interest or best interest, Langbein, J. H. (2004).¬† Yale LJ,¬†114, 929. The duty of loyalty requires a trustee “to administer the trust solely in the interest of the beneficiary.” This “sole interest” rule is widely regarded as “the most fundamental rule of trust law.‚ÄĚ This article advances the view that the sole interest rule is unsound and indicates how it should be modified.

¬∑¬†¬†¬†¬†¬†¬† The trustee’s¬†duty¬†of¬†loyalty, Scott, A. W. (1935). Harv. L. Rev.,¬†49, 521. This article explains the duty of loyalty owed by a trustee to the beneficiaries of the trust, namely that a trustee must not put his own interests before those of the beneficiaries.

¬∑¬†¬†¬†¬†¬†¬† Corporate responsibility and the employee’s¬†duty¬†of¬†loyalty¬†and obedience: A preliminary inquiry, Blumberg, P. I. (1971). Okla. L. Rev.,¬†24, 279. This article discusses the changing role of the large American corporation. It examines the concept of corporate social responsibility and considers the view of corporations as social institutions rather than economic ones. Finally, the article studies the implications of these changes for various groups and for the public at large.

·       Duty of Loyalty: Rethinking Its Scope through its Application in the Field of EU External Relations, The, Neframi, E. (2010).  Common Market L. Rev., 47, 323. This article discusses the duty of loyalty as it relates to European Union member states and their relations with non-member states. The article explores three applications of the duty of loyalty:  it helps ensure the implementation of EU law within member states, it compels member states to help the EU exercise its jurisdiction within states, and it allows the EU and member states to project unity outward toward external states.

¬∑¬†¬†¬†¬†¬†¬† Duty¬†of¬†Loyalty‚ÄĒA Law Professor’s Status Report, Ruder, D. S. (1985). The Business Lawyer, 1383-1402. The article summarizes the obligations of corporate officers, directors, and majority shareholders to act in the best interest of a corporation. It lists the leading cases used to teach the subject “duty of loyalty” to American law students. It concludes that the area should be re-examined by the American Law Institute.

¬∑¬†¬†¬†¬†¬†¬† Duty¬†of¬†Loyalty: The Criticality of the Counselor’s Role, Veasey, E. N. (1990). The Business Lawyer, 2065-2081. This article discusses a few applications of the duty of a director to serve the interests of his company before his own. It explores some of the issues which demonstrate the need for good legal counseling.

¬∑¬†¬†¬†¬†¬†¬† The Corporate Director’s Fiduciary¬†Duty¬†of¬†Loyalty: Understanding the Self-Interested Director Transaction, Beveridge Jr, N. P. (1991). DePaul L. Rev.,¬†41, 655.

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