When is Director Consent and Quorum Required Despite Conflicts?

Question from siya, When is Director Consent and Quorum Required Despite Conflicts?

Answer from AI:

In corporate governance, there are instances where transactions involving a director’s interest still require the consent of the board and a quorum. This ensures transparency and fairness in decision-making. Below are some notable legal cases and general principles in the United States that illustrate these requirements.

Key Legal Cases

1. Smith v. Van Gorkom (1985)

In this landmark case, the Delaware Supreme Court emphasized the importance of informed decision-making by directors. The court held that directors must be fully informed and act in good faith, even if a transaction involves their interests. The case highlighted the necessity of a quorum and proper consent to ensure that decisions are made in the best interest of the corporation.

2. Benihana of Tokyo, Inc. v. Benihana, Inc. (2006)

This case involved a conflict of interest where a director was also a significant shareholder in a company that was part of a transaction. The Delaware Chancery Court ruled that the transaction was valid because it was approved by a majority of disinterested directors, meeting the quorum and consent requirements. This case underscores the importance of having disinterested directors’ approval in conflict-of-interest situations.

3. Cede & Co. v. Technicolor, Inc. (1993)

The Delaware Supreme Court in this case reiterated that directors must act with due care and loyalty. Even if a director has an interest in a transaction, the board must still meet quorum requirements and obtain proper consent to validate the transaction. This ensures that the decision is made with the corporation’s best interests in mind.

General Principles and Legal Requirements

Quorum and Consent

A quorum is the minimum number of directors required to be present for the board to conduct official business. The specific number or percentage required for a quorum is usually outlined in the corporation’s bylaws or articles of incorporation.

• **Quorum Requirements:** Typically, a majority of the board members must be present to constitute a quorum.
• **Consent Requirements:** For transactions involving a director’s interest, the consent of a majority of disinterested directors is often required.

Statutory Guidelines

Many states have statutes that address conflicts of interest and the requirements for board approval. For example:

• **Delaware General Corporation Law (DGCL) Section 144:** This section provides that a transaction involving a director’s interest is not voidable if it is approved by a majority of disinterested directors, the shareholders, or if it is fair to the corporation at the time it is authorized.
• **Model Business Corporation Act (MBCA) Section 8.61:** Similar to DGCL, this act requires disclosure of the conflict and approval by a majority of disinterested directors or shareholders.

Steps to Ensure Compliance

1. **Review Bylaws and Articles of Incorporation:** Understand the specific quorum and consent requirements for your corporation.
2. **Disclose Conflicts:** Directors must fully disclose any personal interest in a transaction to the board.
3. **Obtain Disinterested Approval:** Ensure that a majority of disinterested directors approve the transaction.
4. **Document the Process:** Keep detailed records of the disclosure, discussion, and approval process to demonstrate compliance.

When to Seek Legal Advice

Given the complexities involved in transactions with potential conflicts of interest, it is advisable to consult with a legal professional. An attorney can provide personalized advice and ensure that all legal requirements are met to protect the corporation and its directors from potential liability.

For more detailed information, you can refer to the [Delaware General Corporation Law](https://delcode.delaware.gov/title8/c001/sc04/index.html) and the [Model Business Corporation Act](https://www.americanbar.org/groups/business_law/migrated/mbca/).

Remember, while this information provides a general overview, it is not a substitute for professional legal advice tailored to your specific situation.