What is Self-Dealing in Business?

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Members of an LLC, business partners, corporate officers, and directors have a fiduciary duty of loyalty to act in the best interests of the company. One of the most important obligations that a fiduciary must uphold in business is to avoid conflicts of interest and engaging in self-dealing. Simply put, self-dealing is illegal conduct that occurs when a fiduciary takes advantage of their position for their own benefit. In the event a fiduciary breaches their duty of loyalty by acting in their own self interest, they can cause the company to incur significant financial losses — and be held personally liable for the damages that resulted.

What is Self-Dealing?

Self-dealing occurs when a fiduciary acts in their own best interest while conducting a business transaction, rather than in the interest of the business. In other words, the individual who self-deals is essentially on both ends of the transaction and disregards their duty of loyalty to the company. One of the most common examples of self-dealing is using business resources for a direct personal benefit.

There are many different ways self-dealing can arise. Other examples of self-dealing can include the following:

  • Using company funds for a personal loan
  • Engaging with a connected company without making proper disclosures
  • Failing to share knowledge of a business opportunity with partners
  • Seizing corporate opportunities for a personal benefit
  • Diverting corporate opportunities
  • Engaging in a transaction that involved company assets and receiving a kickback
  • Paying oneself an excessive amount of compensation
  • Insider trading
  • Using corporate assets to pay for personal expenses
  • Purchasing a controlling interest in a competing company

For those who do not have a direct fiduciary duty, self-dealing can also refer to situations where a person buys or sells stocks before relevant information is made public.

Is Self-Dealing Ever Permitted?

The business judgment rule acknowledges that there are risks when it comes to making business decisions. This rule insulates corporate directors and other fiduciaries from liability for making decisions on behalf of the company, as long as they were made in good faith. However, it is important to understand that the rule does not protect corporate officers and other fiduciaries from liability when it comes to self-dealing. Fiduciaries must act in good faith at all times and disclose any conflicts of interest.

Nevertheless, engaging in a conflict of interest may not always lead to liability. While the fiduciary duty of loyalty prohibits self-dealing, it may be permitted in limited instances where the conflicting transaction has been fully disclosed and approval has been given by the other partners or shareholders. Self-dealing is also allowed if the fiduciary can show that the transaction was fair to the company and its shareholders. While it's best to avoid self-dealing entirely, a transaction involving a conflict of interest can be cured subsequently through ratification — this means obtaining approval from the disinterested shareholders after the transaction has already been completed.

When Does Self-Dealing Constitute a Breach of Fiduciary Duty?

Self-dealing can have a substantial economic impact on a company. If an LLC member, corporate officer, director, or other party in a fiduciary relationship engaged in self-dealing, it may constitute a breach of fiduciary duty. In such cases, the party could be held responsible for any harm they caused the company or its shareholders to suffer as a result.

There are a number of both legal and equitable remedies that a court may impose in cases involving self-dealing. For instance, a court may order an award of compensatory damages, disgorgement of profits, a constructive trust, or an injunction to prevent further harm. A judge might also order the appointment of a receiver or order an injunction that requires the fiduciary to take certain actions.

Disputes involving self-dealing don’t always need to be resolved in litigation. In some cases, alternative dispute resolution methods such as mediation or arbitration can successfully resolve business conflicts involving self-dealing and other breach of fiduciary duty matters. These methods can offer a flexible, cost-effective, and efficient way to settle business disputes outside the courtroom with less disruption to business operations.

Contact an Experienced Illinois Business Attorney

If you have been accused of self-dealing, or your company has been financially harmed by it, an experienced business litigation attorney can advise you regarding your options and help you achieve a successful outcome. Located in Rolling Meadows, Litico Law Group provides reliable representation for a variety of business and corporate matters throughout Illinois. We welcome you to contact us by filling out our online form or calling 847-307-5942 to schedule a consultation to learn how we can assist you.