What is the remedy if a director breaches duty of loyalty and the benefits are disgorged?

• A. Enter a new contract with the director.
• B. Award the director compensation.
• C. Set aside the transaction and disgorge benefits through a constructive trust.
• D. Suspend the director for six months only.

Answer: (C)

When a director breaches loyalty by self-dealing, the remedy focuses on undoing the improper transaction and returning the benefits to the corporation. The correct approach is to set aside the transaction and require the director to disgorge the profits, typically through a constructive trust. The corporate fiduciary cannot keep gains earned from a deal in which they had a personal interest; the constructive trust serves to restore the corporation’s position and prevent unjust enrichment by the director. By voiding the deal and placing the disgorged benefits in a trust for the corporation, the remedy directly addresses the breach and protects the corporation’s interests.

Other options don’t fit because they fail to unwind the tainted transaction or recover the ill-gotten gains. Entering a new contract with the director would perpetuate the conflict, awarding compensation would reward the breach, and suspending the director addresses discipline but not the restitution of profits or the invalidation of the self-dealing transaction.