conflict of interest

Hi all,

In CA's non-profit mutual benefit corporation law, there is a section for conflict of interest as copied below:

(a)No contract or other transaction between a corporation and one or more of its directors, or between a corporation and any domestic or foreign corporation, firm or association in which one or more of its directors has a material financial interest, is either void or voidable because such director or directors or such other corporation, business corporation, firm or association are parties or because such director or directors are present at the meeting of the board or a committee thereof which authorizes, approves or ratifies the contract or transaction, if:

(1)The material facts as to the transaction and as to such director's interest are fully disclosed or known to the members and such contract or transaction is approved by the members (Section 5034) in good faith, with any membership owned by any interested director not being entitled to vote thereon;

(2)The material facts as to the transaction and as to such director's interest are fully disclosed or known to the board or committee, and the board or committee authorizes, approves or ratifies the contract or transaction in good faith by a vote sufficient without counting the vote of the interested director or directors and the contract or transaction is just and reasonable as to the corporation at the time it is authorized, approved or ratified; or

(3)As to contracts or transactions not approved as provided in paragraph (1) or (2) of this subdivision, the person asserting the validity of the contract or transaction sustains the burden of proving that the contract or transaction was just and reasonable as to the corporation at the time it was authorized, approved or ratified.

A mere common directorship does not constitute a material financial interest within the meaning of this subdivision. A director is not interested within the meaning of this subdivision in a resolution fixing the compensation of another director as a director, officer or employee of the corporation, notwithstanding the fact that the first director is also receiving compensation from the corporation.
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My question is regarding the (3) clause that precludes the contract between BD and the association as void or voidable (i.e., the contract is not void or voidable under the condition, if I understand it correctly). The (3) condition states that, if I understand it correctly, if the contract between BD and the association is not approved by either the membership or directorship (the board), then the concerned BD (who receiving compensation from association) must prove that the contract or transaction was just and reasonable as to the corporation "at the time it was authorized, approved or ratified."

My question is: how can the BD prove the right course for the contract "at the time it was authorized, approved or ratified" when it has not been approved by the association or the board? Other than the BD himself/herself and not the members nor the board, who could "authorize, approve or ratify" the contract?

Thanks for comments.

KW,

To expand on Janet's answer:

If I'm on the board and own a landscape company that bids on a contract to maintain the Associations common area, I need to disclose to the Board that I am the owner. If I fail to disclose this, and the Association signs the contract, the contract can legally be broken by the board unless I can prove that the contract was just and reasonable.

Such proof might be:

The fact that there was more than one bid and mine was the lowest (providing I didn't know what the other bids were when I submitted mine).

The fact that the prices quoted were similar to other bids the company made on similar property (thus showing that there was no undue advantage).

perhaps a combination of the two above.

KW3

The board director cannot per both (1) and (2) cast a vote if they have any financial interest.

If the contract is being questioned due to financial interest in the company then the person asserting the validity of the contract or transaction (which would be the BD) sustains the burden of proving that the contract or transaction was just and reasonable as to the corporation at the time it was authorized, approved or ratified.

They would need to present evidence on who authorized performance of work, was association over charged or under charged compared to other companies for same service (i.e., did BD over charge for service to line their pocket), etc......

I would then think that the membership would be the ones to determine whether or not the individual proved it was just and reasonable contract ... or if it goes to court a judge would determine.

Does this help?