In a closely held business the owners usually act as management and as discussed in a prior column, owe fiduciary duties to the entity and the other owners. It is quite common for an owner to be involved in a transaction with the company which may directly or indirectly benefit the owner financially. Parties participating in a business divorce often use the conflict of interest statutes in the Arizona Corporation Code to leverage a settlement.
CONFLICTING INTEREST DEFINITION
A conflict of interest transaction involving a director requires a careful examination of the statutory definitions set forth in A.R.S. S10-860. A conflicting interest begins with a transaction effected or proposed to be effected by the corporation, by a subsidiary, or by any other entity in which the corporation has a controlling interest. If at that time the director knows that he or she is a party to the transaction with the corporation, has a beneficial financial interest, or is so close to the transaction that one would expect their judgment would be influenced if the director was called to vote on the transaction, a conflicting interest transaction is present. If the transaction is of such a character and significance it would normally be brought before the board of directors for action, and the director knows that another entity for which he/she is a director, general partner, agent or employee is involved, a conflicting interest is presented. In addition, if the proposed transaction is with an individual who is a general partner, principal, or an employer of a director, it is a conflicting interest.
When a transaction is effected or proposed by the corporation, by a subsidiary, or an entity in which a corporation has a controlling interest, that is a director’s conflicting transaction it shall be enjoined, set aside, or may be subject to damages or other sanctions in a proceeding by a shareholder brought in the right of the corporation, or by the corporation itself because the director has a personal or economic interest in the transaction. The court shall not enjoin, set aside or give damages where the director has met the standard for a director’s safe harbor or a shareholder’s safe harbor, or if the transaction is established to be fair to the corporation.
Part 2 of Conflicts of Interest in Business Divorce will be available Friday, January 23rd.