DUTY OF LOYALTY: CONFIDENTIALITY

The duty of loyalty prohibits a director from using his or her corporate position to obtain a personal profit or to gain a personal advantage. A director is privy to information that may not be known to others outside the corporate sphere. As part of the duty of loyalty, a director cannot take advantage of corporate information for his or her own personal interests.

A director generally must protect the privacy and secrecy of the corporation’s legitimate internal activities. The failure to protect such corporate information from public disclosure may subject the director to a claim of a breach of the duty of loyalty in addition to business tort claims such as trade secrets violations. Directors have frequently pointed to their duty of loyalty and confidentiality in cases where shareholders have sought to make certain confidential corporate information public. In a recent case, Roy Disney fought to disclose publicly certain confidential information he had obtained from the Disney Corporation’s books and records pursuant to a legitimate shareholder demand under Delaware corporation law. Mr. Disney thought the information about executive compensation was vital to shareholders’ and the public’s understanding of the board’s inability to carry out its fiduciary duties. As customarily happens in these kinds of cases, the court fashioned a confidentiality order to prevent “dissemination of confidential business information to ‘curiosity seekers.'”

Corporate best practices dictate that a matter involving the corporation should be treated as confidential unless the corporation’s entrenched policy is to disclose that type of confidential information, the information is already common knowledge, or the information is already of public record. Typically, corporations designate a spokesperson to handle exclusively all publicity about the corporation and all media inquiries. If a director does communicate publicly about corporate matters, he has the duty to communicate honestly. Thus, balancing the duty of honesty and confidentiality when discussing corporate matters can be a difficult and complicated task.

Of course, directors have duties to disclose confidential information under certain circumstances. Under Delaware law, directors have a fiduciary duty to “disclose fully and fairly all material information within the board’s control” when they seek shareholder action. In addition, directors are also required to disclose (or authorize disclosure of) proprietary information to the public under federal securities law.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.