Can a Corporation Enter into a Business Transaction with One of its Directors?

From time to time, a client corporation wants to enter into a business transaction with one of its directors. An astute CEO, recognizing the potential for a conflict of interest, will ask whether and how such a transaction can take place without violating any laws or any fiduciary obligations to the corporation.

California Corporations Code Section 310 provides that, generally, a transaction between a corporation and one of its directors is permitted if, following disclosure of all material facts and the director’s interest in the transaction, it is approved either by a disinterested majority of the board of directors (usually the easier approach) or by the shareholders.

Absent such approval, the transaction will not be void or voidable if the interested director can prove that the transaction was fair and reasonable to the corporation when it was entered into.

Observation: Obtaining board or shareholder approval in advance usually is quicker, safer and less expensive than trying to prove that a transaction was fair and reasonable after the fact.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

One comment

  1. Quora says:

    What are the considerations in contemplating whether a non-executive director may receive fees from the company other than for service as a director?…

    Such a transaction carries the potential for a conflict of interest. Accordingly, the transaction should be disclosed to, and should be approved by, the disinterested directors. Please see “Can a Corporation Enter into a Business Transaction with One …