THE DIRECTORS’ SAFE HARBOR
A director’s safe harbor requires an affirmative vote of a majority of disinterested directors who have no familial, financial, professional or employment relationship with the director. Another safe harbor for the director exists where a disinterested committee of the board voted to approve the transaction after full disclosure. A third safe harbor exists if the director, bound by confidentiality, simply discloses the conflicting interest, the nature of the required non-disclosure, and plays no part in the board’s vote concerning the transaction.
SHAREHOLDER SAFE HARBOR
A director may find a safe harbor by obtaining a majority of the votes of disinterested shareholders after the proper notice is issued describing the conflicting transaction, required disclosure by the director in full to the shareholders, and the director discloses before the shareholder vote, which shares the director(s) controls.
In order to meet the standard of full disclosure, the director must reveal all facts known regarding the subject matter that an ordinary prudent person would deem material in exercising their judgment concerning the transaction. Virtually any family member is a related person to the director. As a result, disinterested voters on the transaction should have no familial interest nor be connected to the director by virtue of a trust or similar relationship.
Conflict of interest transactions are tricky and are present in the transactions of most family or closely held businesses. If the transaction is not fair to the corporation, a disputing owner will seize upon the conflict of interest laws and utilize them to their benefit to achieve a more leveraged, negotiated business divorce.