What to Do When Directors Have a Conflict of Interest

It often happens that your company is voting on something through its Board of Directors, and it turns out that a board member has a conflict of interest with respect to the matter being voted on.

The board member may benefit, personally, by the outcome of the vote, or conversely, may be negatively affected personally by the outcome of a Board of Directors vote. Other board members and management may be appalled that the board member is voting on something he or she has a personal interest in while the board member may feel that it is his or her right to vote on any matter that comes before the board.

So who is right?

Look at Your Corporate Documents

The first thing to do is avoid the problem before it becomes a problem by reviewing your bylaws, management agreement, or other corporate document to see if it addresses conflicts of interest. If it does not it may be time to include it.

What to Do When There is a Conflict

As a general rule, a board member with a conflict of interest should disclose to the board the nature of the conflict, and the board should approve or disapprove of the board member being able to vote on the issue. Note, however, that these requirements may change depending on the nature of the company; for example, boards for condominium associations with conflicts may be handled differently with different laws applying than a traditional corporation.

This process doesn’t always happen; often, board members vote on things and only after the fact is it revealed that the board member had a conflict of interest. Often a board member will not voluntarily disqualify him or herself, even though that would be the right thing to do legally.

Any vote or action of the company taken by board approval, where one (or more) of the board members had a conflict of interest, can be challenged in court. Shareholders can even sue if they have been harmed as a result of the vote or board decision.

Hiding the Conflict or Refusing to Recuse

If a board member refuses to recuse him or herself, you may need to conduct the meeting and conduct the vote, recording the votes of all board members and then challenge the action of the Board in court later on based on the board member having a conflict.

In situations where a conflict of interest is completely hidden by a board member, and where that board member realizes some kind of pecuniary or financial interest, there is even the possibility of criminal actions against the board member.

Often, outside counsel can be helpful in assisting your company in an investigation, to uncover the nature of a potential conflict, in cases where you think, but you aren’t sure, there is or was a conflict. .

There is some debate in courts and cases, about whether a conflict of interest really matters, if the ultimate transaction ended up being good for the company.

Let us help you with legal issues related to your board of directors. Reach out to the West Palm Beach business law attorneys at Pike & Lustig for a consultation.

Source:

councilofnonprofits.org/running-nonprofit/governance-leadership/conflicts-interest