MBE Rules · Business Associations
Interested-Director Transactions
Cal. Corp. Code § 310
The rule
A contract between the corporation and a director (or their entity) is voidable unless disclosed and approved in good faith by disinterested directors, ratified by shareholders, or shown to be just and reasonable when authorized.
In plain English
A transaction between a corporation and one of its directors is not automatically valid; it can be canceled unless the director discloses their interest and the deal is approved by other directors who do not have a conflict of interest, or it is ratified by the shareholders. Additionally, if the transaction is shown to be fair and reasonable, it may still be upheld.
Worked example
A corporation's board of directors is considering a contract with a company owned by one of its directors. The director fails to disclose their ownership interest, and the contract is approved solely by the board without any disinterested directors. Later, the corporation discovers the conflict and seeks to void the contract, which it can do because the transaction was not properly disclosed and approved.
Memory hook
Directors can't play both sides; disclose or lose your ride!
The trap
Exams often present scenarios where the director's interest is subtly implied, leading students to overlook the need for disclosure and approval. Students may mistakenly assume that mere board approval is sufficient without considering the necessity of disinterested directors.
How examiners test it
Questions typically present a fact pattern involving a director's undisclosed interest in a transaction, followed by the board's approval. Students are then asked to analyze the validity of the transaction based on the rules governing interested-director transactions.
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