Pg 27

Question 1

What is a conflict of interest with regard to a corporation?

Answer 1

When there’s a transaction involving the corporation that the defendant is a party to or the defendant had knowledge and a material financial interest in, or the defendant knew that a related person was a party or had a material financial interest in.

Question 2

What are different ways to validate a conflict of interest transaction?

Answer 2

• impartial director or shareholder approval (majority of voting shares not owned or under the control of the interested party)
  – proof of a transaction’s fairness

Question 3

What are the two basic areas for a conflict of interest?

Answer 3

• self-dealing

– corporate opportunity doctrine

Question 4

What are the elements of a conflict of interest?

Answer 4

• corporate transaction
  – person has an interest in the transaction
  – person is either a party to the transaction or has a material financial interest in it or to someone that does
  – D knows of the covered person’s interest in the transaction

Question 5

What does it mean to be a related person with regard to a conflict of interest?

Answer 5

This includes:
- the defendant’s spouse, child, stepchild, grandchild, stepparent, grandparent, sibling, step-sibling, half-sibling, aunt, uncle, niece, nephew [or any spouse of them] and anyone in that relationship to the defendant’s spouse.
– anyone living in the same home as a dependent
– any entity that is controlled by the defendant
– any business or nonprofit that the defendant is a director of
– any unincorporated entity that the defendant is a general partner of the
- anyone in a trust or fiduciary relationship
– anyone controlled by an employer of the defendant
– estranged spouse that the defendant is still married to

Question 6

What are relationships that would not be considered “a related person“ with regard to a conflict of interest?

Answer 6

- boyfriend or girlfriend of the defendant that don’t live in the same house
– lifelong friends
– godparents
- exes
– parents in law

Question 7

What does the word “control“ mean with regard to a conflict of interest?

Answer 7

The power to directly or indirectly elect or remove a majority of members of a board or other governing body and being subject to the majority of the risk of loss from an entity’s activities

Question 8

What is the objectivity test to ask with regard to conflicts of interest?

Answer 8

Would the objectivity of a reasonable director in similar circumstances reasonably be expected to be impaired?

Question 9

What are the two approaches to conflict of interest?

Answer 9

• traditional rule

– modern approach

Question 10

What is the traditional rule for conflict of interest?

Answer 10

The fiduciary duty is absolute and directors and officers are forbidden to enter contracts that create conflict of interest with the corporation. If a director or officer violates this, he is liable to the corporation for profits from the transaction. If he wants to deal with the corporation, he must resign from the board or sell his holdings. The only exception is if the transaction is ratified by shareholders at an annual meeting

Question 11

What is a modern approach to conflict of interest?

Answer 11

Directors and officers aren’t strictly forbidden from having a financial interest in a contract with a corporation, they just need a majority ratification vote from disinterested shareholders or board members after full disclosure of all details of the proposed transaction, and this doesn’t have to be done at the next annual shareholder meeting, they can get approval by disclosing the conflict of interest to the board and asking for ratification.