Self-dealing Transactions

What are self-dealing transactions?

Self-dealing by officers or directors is a breach of fiduciary duty where a person uses their position of power within a corporation for personal gain. Self-dealing can take different forms, such as purchasing or selling assets at inflated or deflated prices, entering into transactions detrimental to the company but favorable to the person, or favoring certain shareholders over others. More often than not, these transactions lead to (or are themselves) conflicts of interest, which can harm the company and its shareholders.

When officers, directors, or key executives engage in self-dealing, they violate their fiduciary duties of loyalty to the company and its shareholders. For example, suppose an officer purchases a company asset at a discounted price and resells it at a profit for personal gain. In that case, the transaction deprives the company of the fair market value for the asset.

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Which laws apply to self-dealing transactions in Florida?

Self-dealing by officers or directors is regulated by Florida statute. Under Florida law, officers and directors owe a duty of loyalty and care to the company and its shareholders. Therefore, officers and directors who engage in self-dealing are liable to the company or a shareholder who brings a derivative action to recover damages for a breach of the duty of loyalty.

What are common disputes regarding director/officer self-dealing transactions that lead to litigation?

The following disputes are among the most common in actions regarding director/officer self-dealing transactions:

Excessive Compensation: Officers or directors may use their position to set their compensation, which may not align with market rates or performance. Shareholders may sue if they believe the officer or director is enriching themselves at the company’s expense.
Asset Sales to Insiders: Officers or directors may also sell company assets, such as real estate or equipment, to themselves or their affiliates at below-market rates, thereby depriving the company of fair value for the asset.
Diversion of Corporate Opportunities: Directors or officers who divert corporate opportunities to their personal businesses or other interests may breach their fiduciary duties to the company. Shareholders may sue if they believe the officer or director is not acting in the company’s best interest.
Insider trading: Insider trading is buying or selling securities while possessing material non-public information about the company. Insider trading by an officer or director is illegal and can lead to litigation by shareholders who may be affected by such activity.

To determine whether your unique situation may necessitate litigation, please contact our office to set up your initial consultation.

What must be proven to file a lawsuit regarding self-dealing transactions, and what are common legal defenses to those claims?

To successfully file a lawsuit regarding self-dealing transactions, a plaintiff must hold stock in the corporation at the time of the wrongdoing, make a demand or show why demand would be futile, and allege with particularity the misconduct and the efforts made to obtain relief.

In addition to these procedural requirements, a plaintiff must prove the following elements:

The officer or director was conflicted when making the challenged decision;
The decision was not in the best interest of the corporation;
The decision resulted in harm to the corporation; and
The harm was avoidable if the officer or director had no conflict of interest.

When a set of facts is appropriate to meet the requirements for a claim of self-dealing transactions, there are many paths a claimant may take. We are value-based attorneys at Jimerson Birr, which means we look at each action with our clients from the point of view of costs and benefits while reducing liability. Then, based on our client’s objectives, we chart a path forward to seek appropriate remedies, such as compensatory damages.

Legal defenses that officers or directors may raise include:

Business Judgment Rule: The defendant can argue that the challenged transaction was made in good faith and with the reasonable belief that it was in the corporation’s best interests.
Lack of Standing: The defendant can argue that the plaintiff lacks standing to sue.
Statute of Limitations: The defendant can argue that the lawsuit was filed outside the statute of limitations, typically four years.

To see what actions or defenses may be available for your unique situation, please contact our office to set up your initial consultation.

What measures should a company take to prevent self-dealing transactions?

To prevent self-dealing by officers or directors, a company should consider the following measures:

Establish clear policies and procedures for transactions with interested parties, including an explicit prohibition of using company assets for personal benefit.
Require disclosure of all potential conflicts of interest (and corresponding recusal from related decisions) by officers, directors, and key executives.
Use independent directors or a special committee to review and approve transactions with interested parties.
Obtain an independent valuation of assets in transactions involving interested parties.
Regularly train officers and directors on conflicts of interest and fiduciary duties.

Have more questions about a self-dealing-related situation?

Crucially, this overview of director/officer self-dealing transactions does not begin to cover all the laws implicated by this issue or the factors that may compel the application of such laws. Every case is unique, and the laws can produce different outcomes depending on the individual circumstances.

Jimerson Birr attorneys guide our clients to help make informed decisions while ensuring their rights are respected and protected. Our lawyers are highly trained and experienced in the nuances of the law, so they can accurately interpret statutes and case law and holistically prepare individuals or companies for their legal endeavors. Through this intense personal investment and advocacy, our lawyers will help resolve the issue’s complicated legal problems efficiently and effectively.

Having a Jimerson Birr attorney on your side means securing a team of seasoned, multi-dimensional, cross-functional legal professionals. Whether it is a transaction, an operational issue, a regulatory challenge, or a contested legal predicament that may require court intervention, we remain a tireless advocate every step of the way. Being a value-added law firm means putting the client at the forefront of everything we do. We use our experience to help our clients navigate even the most complex problems and come out the other side triumphant.

If you want to understand your case, the merits of your claim or defense, potential monetary awards, or the amount of exposure you face, you should speak with a qualified Jimerson Birr lawyer. Our experienced team of attorneys is here to help. Call Jimerson Birr at (904) 389-0050 or use the contact form to set up a consultation.