Self-Dealing and Corporate Opportunity in California: When an Insider Deals With the Company

Last updated: November 2026. Reviewed by Pavel Kolmogorov, California business litigation attorney (State Bar No. 321018).

Self-dealing is a transaction in which a director, manager, or other company fiduciary stands on both sides. A majority owner leasing his own building to the company at double the market rent is a clear example. If he sits on the board of a California corporation, the lease holds up only if disinterested shareholders approved it after full disclosure, or it was just and reasonable to the corporation. (Corp. Code, § 310, subd. (a).) Kolmogorov Law, P.C. litigates these disputes in Orange County, Los Angeles, and statewide.

Call (909) 235-6116 or contact us online to discuss an insider transaction, whether you are challenging it or defending it.

What counts as self-dealing

The label covers any deal in which a director, officer, manager, or controlling owner has a personal financial stake opposite the company's.

A lease of the owner's building. A loan between the company and the owner on terms no bank would offer. A vendor contract with a business the manager's family owns. A management fee paid to the majority's other entity.

The legal source is the duty of loyalty, which our fiduciary duty guide covers. The business judgment rule generally does not shelter a decision made under a conflict of interest.

How a corporation validates an interested-director deal

Corporations Code section 310 gives three routes.

Shareholder approval. The material facts about the deal and the director's interest are disclosed to the shareholders, who approve in good faith, and the interested director's shares do not vote. (Corp. Code, § 310, subd. (a)(1).)

Board approval. The same facts are disclosed to the board, which approves in good faith by a vote sufficient without counting the interested director. This route carries a second requirement: the transaction must also be just and reasonable as to the corporation at the time. (Corp. Code, § 310, subd. (a)(2).)

Fairness alone. If neither approval happened, the deal can still stand. But the person defending it carries the burden of proving it was just and reasonable to the corporation when authorized, approved, or ratified. (Corp. Code, § 310, subd. (a)(3).)

Two details matter in closely held companies. With two or three owners there may be no disinterested director or shareholder, which leaves only the fairness route. And sitting on both boards, without more, is not a material financial interest. (Corp. Code, § 310, subd. (a).)

LLCs and partnerships: loyalty written into the statute

For LLCs the duty is statutory. A manager, or a member of a member-managed LLC, must account to the company for any profit or benefit derived from its activities or property. The same person must refrain from dealing with the company on behalf of an adverse interest and from competing with it. (Corp. Code, § 17704.09, subd. (b).) In a manager-managed LLC those duties bind the managers, not the passive members. (Corp. Code, § 17704.09, subd. (f).)

An operating agreement generally cannot eliminate the duty of loyalty. It may identify specific categories of activity that do not violate the duty, if not manifestly unreasonable. It may also set the vote by which members can ratify a conflicted transaction after full disclosure of all material facts. (Corp. Code, § 17701.10, subd. (c)(14).) Any modification of fiduciary duties requires a written operating agreement and the members' informed consent. (Corp. Code, § 17701.10, subd. (e).)

General partners owe the same three loyalty duties. (Corp. Code, § 16404, subd. (b).) The partnership statute adds two points that defendants cite often. A partner does not breach a duty merely because his conduct furthers his own interest, and a partner may lend to or do business with the partnership. (Corp. Code, § 16404, subds. (e), (f).)

Corporate opportunity: when the deal belonged to the company

A related claim arises when the insider does not deal with the company at all, but takes something the company would have wanted. A director learns that the lot next to the warehouse is for sale and buys it himself.

California recognizes the corporate opportunity doctrine. A fiduciary may not acquire, in opposition to the corporation, property in which the corporation has an interest or a tangible expectancy. Under the interest or expectancy test the company needs a "beachhead": a legal or equitable interest or expectancy growing out of a preexisting right or relationship. Courts may also consider whether the company had the financial resources to pursue the opportunity. (Kelegian v. Mgrdichian (1995) 33 Cal.App.4th 982, 988-990.)

Whether an opportunity belonged to the company is primarily a question of fact. (Id. at p. 989.) In Kelegian the claim failed. Some directors had talked about keeping share ownership proportionate, but the board took no formal action adopting that policy. A director who bought another holder's shares for himself therefore did not usurp an opportunity. (Id. at pp. 990, 992.)

The LLC and partnership statutes reach this conduct expressly. The duty to account includes "the appropriation of" a company opportunity. (Corp. Code, §§ 17704.09, subd. (b)(1), 16404, subd. (b)(1).)

Remedies for self-dealing

The remedies track the wrong. The insider can be made to give up the profit. The LLC and partnership statutes say he holds it as trustee for the company. A court can impose a constructive trust on property gained by a wrongful act or the violation of a trust. (Civ. Code, § 2224.) A tainted contract may be set aside, and the company can seek what it overpaid.

Who sues also matters. The injury usually belongs to the company, so a minority owner often has to proceed through a derivative action.

If you are the minority owner

My first advice rarely changes: get the documents before you make the accusation.

That means the contract, the minutes or consents approving it, records showing who owns the counterparty, and a market comparison. Shareholders can use the inspection statute. Then ask in writing whether and how the deal was approved. In a corporation, a deal with no disinterested approval leaves the person defending it to prove it was fair.

If profits leave as rent or fees while you receive nothing, see minority shareholder rights and withheld LLC distributions.

If you are the director or manager accused of a conflict

A conflict is not, by itself, a breach. The law allows owner-operators to do business with their own companies. What it tests is disclosure, approval, and fairness.

If the deal was disclosed and approved, gather the proof. If it was not, assemble the fairness evidence: appraisals, competing bids, what an unrelated party would have charged. And consider fixing it. Ratification after full disclosure, or resetting the price to market, often costs less than defending the old terms.

What to bring to the first meeting

Bring the contract, the articles, bylaws, or operating agreement, and any minutes or consents that mention the deal. Add financial statements showing the payments, any market pricing data, and your written requests for information with the responses.

Frequently asked questions

The majority owner leases a building he owns to our company at double the market rent. Is that self-dealing under California law?

It is an interested transaction, and whether it is a breach depends on disclosure, approval, and fairness. Under Corporations Code section 310, a California corporation's deal with its director is not voidable because of the director's interest if disinterested shareholders approved it in good faith after full disclosure. Without that vote, the lease must be just and reasonable to the corporation, and unless disinterested directors approved it the person defending it carries the burden. Twice the market rate is hard to defend.

What is self-dealing by a director?

Self-dealing occurs when a director has a material financial interest in a transaction with the corporation he or she serves. California law does not void such a transaction automatically. It asks whether the material facts were disclosed, whether directors or shareholders without a stake approved in good faith, and whether the terms were just and reasonable to the corporation when approved.

I manage an LLC and I also own the company that provides its staffing. Do I have a conflict of interest problem in California?

You have a conflict that needs handling, not necessarily a breach. A California LLC manager must refrain from dealing with the company on behalf of an adverse interest and must account for benefits derived from its business. Disclose the material facts to all members in writing, obtain their approval or ratification as the operating agreement provides, and keep proof that your pricing matches the market.

What is usurping a corporate opportunity?

It is taking for yourself a business opportunity that belonged to the company you owe fiduciary duties to. California courts ask whether the company had an interest or tangible expectancy in the opportunity, arising from an existing right or relationship, and whether it could have pursued it. The answer depends on the facts of each case, and no single factor controls.

Can an operating agreement waive the duty of loyalty in California?

Not entirely. Under Corporations Code section 17701.10, a California LLC's operating agreement generally may not eliminate the duty of loyalty. It can identify specific types of activities that do not violate the duty, if that is not manifestly unreasonable, and can provide for ratification of a specific conflicted transaction after full disclosure.

Talk to a California shareholder and partnership dispute attorney

If an insider is doing business with your company on terms you question, or you have been accused of a conflict, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is located at 327 Magnet, Irvine, CA 92618, and represents owners and companies in Orange County, Los Angeles, and throughout California. See our partnership and shareholder dispute practice.

This page provides general information about California law and is not legal advice. Outcomes depend on the governing documents, the facts, and the court.