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What is a Conflict of Interest, and How Can it Affect Your Business?

An often underestimated, but potentially dangerous, threat to any business is the risk of a conflict of interest among its executives or directors. If left unaddressed, a conflict of interest can result in a conflicted director or executive reaping potentially substantial profits at the expense of the business as a whole. But what exactly is a conflict of interest, and how do you avoid the potential problems that can be caused by a conflict of interest?

What is a Conflict of Interest?

In business law terms, a conflict of interest refers to any situation where someone has a fiduciary duty to their employer that conflicts with their own personal or economic interests. In other words, they are supposed to put the goals and needs of their employer before their own, but cannot reasonably do so because of relationships or investments outside of the company. This places the conflicted individual at odds with their own employer, risking a breach of their fiduciary duty.

What Does a Conflict of Interest Look Like?

There are many ways they could manifest. For example, an executive tasked with finding a supplier for their company may be conflicted if one potential supplier is owned by their sibling. Meanwhile, an executive may be conflicted if they are asked to approve of merging with a company they have an ownership interest in, allowing them to personally profit from such a deal. In either case, the individual’s personal relationship influences what should otherwise be an impartial business decision.

What is the Danger of a Conflict of Interest?

When an owner or a high-level decision maker at a company has a potential conflict of interest, they potentially endanger their company’s business interests by placing their own interests over their duty to the company. Even the potential appearance of a conflict of interest can cause harm, bringing the individual’s judgment into question, and potentially leading to litigation from shareholders or other injured parties.  Costly litigation may result in order for the other owners or shareholders to hold the conflicted individual to account for losses their conduct caused to the business.

What Should You Do if Someone Has a Conflict of Interest?

Anyone who is discovered to have a conflict of interest in their current position should promptly disclose that conflict to other executives and board members. They should also refrain from engaging in any business decisions which might be impacted by that conflict. With proper disclosure and remedy, many of the issues caused by a conflict of interest can be avoided, but you should still consult with a business law attorney to ensure the best possible outcome to your situation.  If you own a business with other people, or are the sole owner of a business looking to take on new partners, properly drafted documents organizing your business will help reinforce the duty of loyalty owed to the business.  Such documents can also spell out the precise conduct that violates the duty of loyalty, or even create necessary exceptions depending on the nature of your business, such as whether or not to permit the owners of a real estate company to invest in other real estate projects.

The Law Offices of Hunziker, Jones & Sweeney routinely handle business law matters for New Jersey business owners, whether for a small start-up, a mid-sized company, or a large corporation. Whether the matter concerns the drafting of a simple agreement, or instead involves a more complex transaction involving multiple parties or facets, the firm can assist. Contact the firm for a consultation at (973) 256-0456 or fill out our contact form for a consultation.

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