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California Business Law: Self-Dealing Explained

self-dealing.jpgSelf-dealing is an unlawful business practice that occurs when someone who has a fiduciary duty puts their own personal financial interests above the interests of the organization to which they owe that duty. In California, self-dealing is a form of business fraud. If your business interests have been adversely affected by insider self-dealing, please contact an experienced San Jose business fraud attorney to learn more about your legal options.

The Self-Dealing Rule

Section 5233 of the California Corporations Code sets out standards for handling business transaction in which self-dealing might occur. If a company is considering moving forward with a transaction, and at least one of the controlling directors has a personal financial interest in the transaction, the strict Section 5233 requirements must be followed. In order to prevent improper self-dealing:

  • The transaction must be fair and reasonable for the company;
  • The company must gain a clear and obvious benefit from the transaction;
  • The financially interested director(s) can gain no undue financial benefits;
  • There must be a full disclosure of all material interests prior to the execution of the transaction; and
  • A majority of disinterested directors must agree to support the transaction.

How to Respond to Fraudulent Self-Dealing

Fundamentally, self-dealing is a breach of fiduciary duty. The directors who have a controlling stake in a corporation, or a non-profit, owe a fiduciary duty to their organization. This duty obligates that director to act in the best interests of the organization. Conflicts of interests should be avoided, and if they occur, the interests of the organization must be put ahead of any conflicting personal interests. California takes self-dealing very seriously. The damages caused to the organization and its stakeholders can be significant. If you have been victimized by an insider's self-dealing, you may be entitled to:

  • Compensation for any direct loss of value;
  • The profits the offending party made from the self-dealing transaction;
  • Compensation for the use of corporate assets that were accessed during the transaction;
  • Full and fair interest payments; and sometimes
  • Punitive damages.

The victims of self-dealing, including the corporation itself, as well as its stakeholders, are entitled to equitable and fair relief. Under California law, the courts have wide discretion to consider the specific circumstances of the alleged self-dealing in order to determine an adequate remedy.

Contact an Experienced San Jose Business Fraud Attorney

Your interests can be seriously damaged by an improper insider self-dealing. The experienced San Jose business fraud attorneys at Diemer, Whitman & Cardosi, LLP can help protect your financial interests. If you have been the victim of any type of business fraud, please contact our San Jose office today at 408-971-6270 to set up a free initial consultation. We proudly serve clients throughout Silicon Valley and the Bay Area.

Sources:

http://www.leginfo.ca.gov/cgi-bin/displaycode?section=corp&group=05001-06000&file=5230-5239

https://www.law.cornell.edu/wex/fiduciary_duty

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