COMMENT

Source: Model Act, proposed § 8.62. This replaces former § 14-2-155(a)(1).

Section 14-2-862 provides the procedure for action of the board of directors under Part 6. In the normal course, this section, taken together with Section 14-2-861(b), will be the key provision for dealing with directors' conflicting interest transactions.

Subsection (a) provides the basic rule: a transaction respecting which a director has a conflicting interest is approved under Section 14-2-862 if and only if it is approved by the affirmative vote of a majority (but not less than two) of the qualified directors on the board or on a duly authorized committee of the board. Except to the extent provided in subsection (b), such approval must be preceded by required disclosure. Qualified directors are defined in subsection (d).

Action complying with subsection 14-2-862(a) may be taken by the board of directors at any time - before or after the transaction.

Directors' actions approving a director's conflicting interest transaction can only occur after full disclosure of all material facts, covered by the reference to "required disclosure." Subsection (b) is a new provision designed to deal, in a practical way, with situations in which a director who has a conflicting interest of the type described in Section 14-2-860(1)(B) is not able to comply fully with the disclosure requirement of subsection (a) because of an extrinsic duty of confidentiality. The director may, for example, be prohibited from making full disclosure because of restrictions of law that happen to apply to the transaction (e.g., grand jury seal or national security statute) or professional canon (e.g., lawyers' or doctors' client privilege). The most frequent use of subsection (b), however, will undoubtedly be in connection with common directors who find themselves in a position of dual fiduciary obligations that clash. In such circumstances, subsection (b) makes it possible for such a matter to be brought to the board for consideration under subsection (a) and thus enable both the company and the director to secure the protection afforded by Part 6 for the transaction despite the fact that D cannot make the full disclosure usually required.

To comply with subsection (b), D must disclose that he has a conflicting interest, inform the directors who vote on the transaction of the nature of the duty of confidentiality (e.g., inform them that it arises out of an attorney-client privilege or his duty as a director of Y Co. that prevents him from making the disclosure called for by clause (ii) of Section 14-2-860(4)) and then play no personal part in the board's deliberations.

Subsection (b) is not available to a director if the transaction is directly between the corporation and the director or his related person described in Section 14-2-860(a)(3)(A) - if, that is, the director or such related person is a party to the transaction.

Subsection (c) provides special quorum rules for approval of director's conflicting interest transactions. A majority of the qualified directors constitutes a quorum for board action, but a quorum may never be less than two directors.

Subsection (d) defines those "qualified" directors who can act to approve a director's conflicting interest transaction. The definition is broad: it excludes not only any director who has a conflicting interest respecting the matter, but also - going significantly beyond the persons specified in the subcategories of Section 14-2-860(1)(ii) for purposes of the "conflicting interest" definition - any director whose familial or financial relationship with D or whose employment or professional relationship with D would be likely to influence the director's vote on the transaction. The notion of relationships between directors that disqualify a director are specified: they must arise from "a familial, financial, professional, or employment relationship" with the other director. Further, the subsection imposes an objective standard of influence: the relationship must, "in the circumstances, reasonably be expected to exert an influence on the first director's judgment." This rejects the notion of "structural bias"; that by nature of their relationships all directors are disqualified from judging the fairness of their colleagues' transactions with the corporation. In order for director action to be effective under Section 14-2-862, it must be taken, of course, in compliance with the requirements of Section 14-2-830(a) that a director must discharge his duties "in a manner he believes in good faith to be in the best interests of the corporation," and "with the care an ordinarily prudent person" would exercise. If, for example, "qualified directors" vote in favor of a transaction, as an accommodation to the director who has a conflicting interest, without complying with the requirements of Section 14-2-830(a), the board action would not be given effect under Section 14-2-861(b).

Cross-References Action by the board of directors, see §§ 14-2-821 &14-2-824. By-laws governing quorum and voting requirements for directors, see § 14-2-1022. Committees of the board of directors, see § 14-2-825. Compensation of directors, see § 14-2-811. Continuing Directors in business combinations with interested shareholders, see § 14-2-1111. Limits on liability of directors, see § 14-2-202(b)(4). Quorum for directors' meetings, see § 14-2-824. Standards of conduct for directors, see § 14-2-830.

JUDICIAL DECISIONS

RESEARCH REFERENCES