The Study On The Directors’ Duty Of Loyalty

Traditionally, the directors’ duty of loyalty is considered to avoid conflicts ofinterests, which means that the directors shall not be detrimental to the interest of thecompany for his own sake. The context above can be extracted to two elements, oneof which is that the directors shall not do for the personal interests; the other is thedirectors shall not damage the interests of the company. In the practice of moderncorporation law, the meaning of the directors’ duties of loyalty shall be reconsidered:A director’ acquiring of his own interest is no longer strictly forbidden by the duty ofloyalty, and the only criterion to judge whether the directors breach the duties ofloyalty is the their damage to the corporation’s interests. The definition of moderndirectors’ duties of loyalty is a director shall not harm or possibly harm thecorporation’s interests. The specific contents of the directors’ duties of loyalty focuson the “conflicts of interest” and mainly contain three aspects: the prohibition ofself-dealing, usurpation of corporate opportunities and business strife. The subjects ofdirectors’ duties of loyalty include, in addition to directors, senior managers, actualcontroller and controlling shareholders.Directors’ duty of loyalty is a very abstract obligation with highly degree ofgeneralities. Therefore, modern corporation law in every country specifies andenumerates the contents of the duties through judicial precedent and statutes. Thoughthere are possible damage to the interests of corporations through the self dealingbetween the directors and the corporation, it is only a possibility and potential riskwhich could be avoided. Even in some situation that the company could gain benefitfrom self dealing with directors without loss in profits, such as selling goods tocompanies under the market price or providing low interest loans. Thereforeprohibition with rigidly uniform was considered to be outdated. Corporation law inother countries has made appropriate adjustments, such as allowing the directors’ self dealing with the company conditionally. Directors, abiding by the duties of loyalty tothe corporation, are prohibited to seize the business opportunities belonged to thecorporation. If the directors breach the duties, the company can certainly requiresdamages; meanwhile, as a way of remedy to seizing the opportunities for the company,the properties and interests gained by the directors can also be treated as thecompany’s trust maintenance. This jurisprudence is the theory of companyopportunities gradually developed from the case law of the United States. Theobligation of prohibition of business strife is one of the essential content of thedirectors duties of loyalty and the general requirements to them in modern nationscorporation law, which is to prohibit the director engaging in the competitive businesswith the company he takes office in. the director who, based on his position in thecompany, knows huge numbers of company’s confidential secrets, company’sinformation and statistics about the customers, once is allowed to compete in businesswith the company, it would be detrimental to the company; but this is not thelimitation that can not be broke through, and it would be allowed if the directorsacquired the permission from the board of shareholders, general meeting ofstockholders or the board of directors.In the modern society, it is common for thedirectors to serve for different companies. When conflicts of interests occur amongthose companies, such as direct, indirect and competitive trade, and additionally thecompetition for the corporate opportunities. In other words, a director shall not impairone company’s interests for the sake of another. However, in the case of bindingrelationship between corporations, interlocking (dispatching) directors could be one ofthe corporation’s strategies. As for the corporations where directors interlockedwithout binding relationship, the director should try to avoid engaging in theconflicting businesses between the corporations he served. If this conflictingsituations continued, the development of corporate business could be impeded, whichtherefore lead to the director’s failing to fulfill his obligations and resigning from oneof the corporations and relieving the employable relationship. Certainly it can not bedenied that, as for a director who already served for other companies, considering hismanaging skills, fame and credit, other companies would employ him holding the same position, but that is an unwise decision considering the corporation law and theAnti-Unfair Competition Law. The interlocking of directors in biding corporationsemerged according to the corporate strategies, should be studied together with theunbinding corporations. The author would analyze this binding relationship fromvarious perspectives such as the strength and the purpose of binding and take thetypical example of holding companies, subsidiaries and joint companies in thecombination of capitals. Regardless of various kinds of binding options, one thing isstable, that is that the directors carry the burden of duties of loyalty of avoidingsacrificing the corporate interests for his benefits or others’. In the relations of holdingcompanies and subsidiaries which both employed the same director, it is hard toexpect the director’s appropriate actions for the subsidiaries.The development of the directors’ duties of loyalty is a process of totalprohibition to relative liberalization which means that it is conditionally liberalized,and a cleaning mechanism is needed to wash off the spots of conflicting trade betweenthe directors and the companies, which make it extremely similar in form and extentto the normal transactions between the third parties and the corporations. Specifically,the directors are allowed to carry out self dealing with the company, seize theopportunities originally belonged to it or perform business strife with it, yet whichshould obtain the company’s approval or consent at first. Those deeds will not breachthe directors’ duties of loyalty unless they have been ratified by the company. Moderncountries’ corporation law set up a series of requirements for this eliminationmechanism, such as the obligations of disclosure and the avoidance of interesteddirectors; and the common law even provides the substantial standard—fairness,which is also the criteria of judicial review. The introduction of criteria of substantivereview after the full disclosure makes the approval and ratification of directors not aessential element for valid transaction and deeds, the effect of which shifted theburden of proof, that is to say, if the director’ transaction or behavior was proved orratified by the non-interested director, then the one who brought up the dispute shouldcarry the burden to prove the unfairness to the company, or to prove that it isimpossible for the non-interested director who approved or ratified it to reasonably conclude that the transaction or deeds approved or ratified by them was fair to thecompany; conversely, if the director did not acquire the approval or the ratification, heshould carry the burden of proving that his trades or deeds is fair to the company. Inthis model, non-interested shareholder is also subject to judicial review, which is onlybased on the resolution of shareholders, resulting in the waste of company’s assets,but what they try to express and essentially pursue is to the fairness to the companyand no damage to its interests. So it can be said that the introduction of substantivereview enormously weakened the effect of oblique’s approval or ratification.Therefore, if the law in the UK or California in the US which do not introduce thismechanism emphasizes more about the oblique’s willingness, then the model offairness review pay more attention or the objective fairness of the transaction orbehavior.The directors’ duties of loyalty are a statutory obligation for directors and seniormanagers, breach of which will assume liabilities; according to the corresponding lawof our country, there are two ways of liabilities: one is the “company’s disgorgement”;the other is the “damages”. Doctrines herein provided three kinds of directors’ dutiesof loyalty, because they can de excluded by the resolution of the shareholders’ generalmeeting, and the directors or senior executives could be exempted from disgorgementliability if receiving the consent of the general meeting of shareholders. However, ifthe approved transactions or actions cause actual damage to the corporation, thedirectors or senior executives who performed this are still liable for the compensationfor damages.