COMMENT

Source: Model Act, proposed § 8.63. This replaces former § 14-2-155(a)(2).

Section 14-2-863 provides the machinery for shareholder safe harbor of a director's conflicting interest transaction, as Section 14-2-862 provides the machinery for safe harbor by action of directors.

Subsection (a) follows the basic pattern of former law, but specifies in detail the procedure required to establish effective safe harbor protection of a director's conflicting interest transaction through a vote of shareholders. Shareholders must be given notice describing the transaction. The director must notify the secretary as to any shares beneficially owned or voted by the director or his related person, in compliance with subsection (d). Required disclosure must be made, as defined in Section 14-2-860(4). Subsection (a) does not contain the exception for a director under a duty of confidentiality. The remaining members of the board are expected, in submitting the transaction to shareholders, to provide sufficient information to satisfy the standard of required disclosure. If, following proper disclosure, a majority of all qualified shares that are entitled to vote on the matter vote favorably, the safe harbor provision of Section 14-2-861(b)(2) becomes effective.

Action that complies with subsection 14-2-863(a) may be taken at any time - before or after the transaction.

Under subsection (a) only "qualified shares" may be counted in the vote for purposes of safe harbor action pursuant to Section 14-2-861(b) (2). Subsection (b) defines "qualified shares" to exclude all shares that prior to the vote the secretary or other tabulator of the votes knows to be owned or controlled by the director who has the conflicting interest or any related person of that director. It should be stressed that this definition is dependent upon the tabulator's actual knowledge. If the tabulator does not know that certain shares are owned by the director who has the conflicting interest, he cannot be expected to exclude those shares from the vote count. But see the Comment to subsection (e).

The category of persons whose shares are excluded from the vote count under subsection (b) is not the same as the category of persons specified in Section 14-2-860(1) (ii) for purposes of defining a director's "conflicting interest" and not the same as the category of persons excluded for purposes of the definition of non-qualified directors under subsection 14-2-862(d). Those distinctions among these categories are deliberate and carefully drawn. While Section 14-2-862 is concerned with a wide range of relationships that might influence a director in his fiduciary capacity, shareholders voting as shareholders are not fiduciaries, and are typically entitled to vote in their own interests. The common ownership of shares is sufficient assurance that shares generally will be voted in the common interests of shareholders. Thus only shares beneficially owned or voted by or under the control of the director or his related person will be disqualified.

Subsection (c) provides a special quorum rule for shareholder approval - a majority of the votes to be cast by holders of all qualified shares, rather than a majority of the votes of all shares, required by Section 14-2-725(a). Like other quorum requirements, this one could be increased by an amendment of articles of incorporation or bylaws under Sections 14-2-1003 or 14-2-1021.

The fact that certain shares are not qualified and are not countable for purposes of subsection (a) is not intended to mean that they are not properly countable for other purposes such as, for example, a statutory requirement that a certain fraction of the total vote or a special majority vote be obtained.

Subsection (d) provides a procedure for assuring that only qualified shares are counted toward shareholder action approving a director's conflicting interest transaction. It requires the director who has a conflicting interest to notify the corporate secretary of shares beneficially owned or the voting of which is controlled by that director or by related persons of the director. Placing the burden on the director to identify disqualified shares relieves the tabulator of votes of a duty to investigate whether shares are qualified. If the tabulator does not know that shares are owned or controlled by a director with a conflicting interest, or by a related person of his, the shares are "qualified" pursuant to the definition of subsection (b), and the vote cannot be attacked on the ground that nonqualified shares were voted; but see subsection (e).

If a director with a conflicting interest did not provide the information required under subsection (d), the shareholders' action is not in compliance with subsection (a) and the director has no safe harbor under subsection (a), in the absence of which he can be put to the challenge of establishing the fairness of the transaction under Section 14-2-861(b) (3). Subsection (e) provides that if the director's failure did not determine the result of the vote, and is shown to be inadvertent or negligent, rather than deliberate, the court is free to fashion an appropriate alternative remedy, rather than put the director to the proof of the fairness of the transaction.

Cross-References Action by shareholders, see § 14-2-725 et seq. Bylaws governing quorums and action by shareholders, see § 14-2-1021. Quorums and voting requirements: generally, for voting groups, see § 14-2-725; greater quorum & voting requirements, see § 14-2-727; for business combinations with interested shareholders, see §§ 14-2-1111 and14-2-1132. Secretary of the corporation defined, see § 14-2-140.

RESEARCH REFERENCES