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What is the Interest of the Company?

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  • Written By: M. Lupica
  • Edited By: John Allen
  • Last Modified Date: 03 November 2016
  • Copyright Protected:
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    Conjecture Corporation
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The “interest of the company” standard is a basic legal construct dictating that any actions by officers or directors on behalf of a company have reasonably positive consequences for the company. At its core, the “interest of the company” standard is to protect shareholders from abuses of power by those directing the company. Different jurisdictions have different repercussions for directors that commit acts that violate this standard. While some acts may result in criminal charges against the director or officer who makes the transaction that is not in the interest of the company, others simply result in the voiding of the transaction.

The nature of corporations, in which a few directors have access to shareholders' money, requires the existence of some standard to protect against abuse. As a result, the “interest of the company” standard was developed at common law and persists today in most jurisdictions’ corporate laws. The standard governs all acts by directors that are made on behalf of the company. By requiring that any and all acts be made in the interest of the company, any shareholder who has entrusted money to the few directors in control can do so with confidence that the directors are acting in his or her interest, promoting investment.

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Depending on the nature of the act by the director that violates this standard, there are different repercussions. At common law, any transaction that did not meet this standard was deemed void and the director could be held financially responsible for any damages to the third party with whom the voided transaction was originally made. If the act by the director is not only in the interest of the company, but was made with fraudulent intent, then the director may be held criminally responsible. For example, a director who directs a sale of company assets at a reduced price to another company in which he or she has an ownership stake may be held criminally liable for defrauding investors.

The “interest of the company” standard has been expanded by statute in most jurisdictions beyond direct financial benefit. By expanding the definition to include the impact on the community, the standard allows for directors to benefit the community at large through the company as long as the acts do not result in a substantial detriment to its investors. Without such a broad interpretation of the standard, directors would be obliged to continually act in the interest of the financial benefit of the company, even in the face of significant detrimental effects on the community at large.

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