In this article, we explain corporate director and officer conflicts of interest in Illinois. We will explain the duties of officers and directors to disclose conflicts of interest when a corporation engages in transactions with entities in which they have financial interest. We will also discuss personal liability for breach of fiduciary duty, when directors and officers are not able to prove that a transaction in which they have a conflict of interest was fair to the corporation.
First, let’s review corporate structure. The owners of a corporation are its shareholders. The shareholders will vote to elect a board of directors to manage the long-term corporate strategy of the corporation. The directors in turn vote to elect officers, such as president, vice-president, secretary, treasurer, CEO, COO and CFO. The officers are responsible for the day-to-day management of the corporation. In small or closely held corporations, the shareholders, directors, and officers may all be the same people. The types of decisions that are made by directors and officers are defined by the corporation’s bylaws.
If corporate officers and directors engage in transactions between the corporation and themselves or another entity in which they have a financial interest, they may be held personally liable for breach of fiduciary duty based on a conflict of interest and the transaction may be invalidated.
The director or officer will not be liable and the transaction will not be invalidated if the transaction was fair to the corporation at the time that it was authorized. However, the director or officer with the potential conflict of interest has the burden of proving that the transaction in question was fair unless:
- The director or officer disclosed the director’s interest in the transaction as well as all of the material facts to the board of directors, and the board (or an authorized committee) approved or ratified the transaction by a majority of directors who did not have an interest in the transaction; or
- The director or officer disclosed the director or officer’s interest in the transaction and the material facts of the transaction to the shareholders of the corporation, and the shareholders who did not have an interest in the transaction approved the transaction by majority vote.
If the board of directors or the shareholders fail to properly approve a transaction in which a director or officer has a potential conflict of interest after proper disclosure of such conflict, then the director or officer has the burden of proving that the transaction was fair to the corporation. If he or she fails to do so, he or she may be held personally liable for any damages to the corporation that resulted from the transaction and the transaction may be invalidated.