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BHGR Newsletter: Conflicting Interest Transactions

August 2009

When a director of a closely-held corporation in Colorado enters into a business transaction with a corporation individually or through another entity, the director should take great care to ensure that the corporation has complied with the Colorado laws regarding conflicting interest transactions. While directors are not prohibited from doing business with the corporation per se, courts may void such a transaction if it does not meet at least one of the following three requirements: (i) the material facts regarding the director's relationship or interest are disclosed to the board of directors and the board in good faith authorizes the transaction, (ii) the material facts regarding the director's relationship or interest are disclosed to the shareholders of the corporation and the shareholders specifically authorize the transaction, or (iii) the transaction is fair as to the corporation. See Colorado Revised Statutes § 7-108-501(2)

While the statute suggests that compliance with only one of the requirements will shield the transaction from subsequent legal challenge, Colorado courts have thus far not provided clear guidance on this issue. However, the most recent decision of note seems to suggest that a conflicting interest transaction may be voidable if it does not meet all three of the statutory requirements. See Kim v. Grover C. Coors Trust, 179 P.3d 86, 91 (Colo. App. 2007).

Consequently, the director and the corporation are advised to submit the proposed transaction to a vote of the board and the shareholders and to memorialize these actions in writing to ensure that the terms of the transaction are fair to the corporation. Moreover, all material information regarding the transaction should be disclosed to the board and shareholders in order to avoid potential nondisclosure claims after the transaction is consummated. While this course of action may appear to be unnecessary under the statute, the cost of litigating a shareholder's conflicting interest transaction claim will almost certainly surpass the cost of taking these few precautions prior to entering into the transaction.

If you have any questions about conflicting interest transaction law compliance, contact our Business Transactions Practice Group.

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