One of the pillars of corporate law is the directorsâ fiduciary duty of loyalty to the corporation and its shareholders. In general, the duty of loyalty requires that a director, in making decisions, act on a disinterested and independent basis, in good faith, with an honest belief that the action is in the best interests of the company and its stockholders.
The duty of loyalty may be breached if a directorâs ability to do this is compromised. The most obvious example is a director who has a direct personal interest in a transaction being considered by the board. However, a breach of fiduciary duties is possible even without a direct financial conflict if a director has significant relationships with an interested party that reasonably call the directorâs independence and impartiality into question, such as financial or long-standing personal or social connections. As the courts have held, independence turns on whether âthe directorâs ability to act impartially on a matter important to the interested party can be doubted because that director may feel either subject to the interested partyâs dominion or beholden to that interested party.â