Normally members of a board of directors are not allowed to engage in transactions with the company due to the conflict of interest (“conflict transactions”). This video describes the prohibition against conflict transactions and how to overcome it. Understanding these concepts can greatly reduce the likelihood of a derivative lawsuit involving you and/or your corporation.
[Enhanced Video Transcript]
Hello, and welcome to another edition of Genesis Law Firm Teaches. The topic of today’s video: Director Conflicts and Exceptions in Washington State.
The general rule is that directors on a company’s board are not allowed to have an interest in transactions involving the company. This prohibition extends to the people and entities related to the board members, such as the directors’ businesses, spouses, children, and people who they control–all these people and entities are prohibited from engaging in transactions with the company. This ensures that the board members are acting in the best interest of the company.
However, this prohibition against conflict transactions is not absolute. After all, some transactions between board members and the company might be in the company’s best interest. There are exceptions to the conflict of interest rule
Let’s go through those exceptions.
Exception 1: Unbiased Board Members Approve
The first exception is if the unbiased board members approve the transaction. For this exception to apply, the biased board member would need to disclose both the conflict itself and any information that would be relevant to the company’s decision.
For example, if a board member is selling an expensive item like a dump truck to the company, that board member should disclose any information that the company would need to know in order to evaluate the fairness of the transaction. It may be that the dump truck is a very good price, and so the transaction might seem fair on its face. But it could also be that that dump truck has a bad alternator. The director would need to tell the company about that bad alternator.
Exception 2: Unbiased Shareholders Approve
Another way of approving a conflict transaction: the unbiased shareholders say it’s okay. The unbiased shareholders could vote and ratify the transaction. As before, the biased board member would need to disclose the information related in the previous exception.
Exception 3: Judge Says Fair
A third way for the transaction to take place would be for a judge to deem the transaction fair. This is an expensive option–a last resort.
For more information on this, and related legal topics, I would encourage you to review the videos and articles available under our website’s ‘Resources’ tab. Or call our firm at 866-631-0028 to speak with one of our attorneys.