Also known as: interested directors · conflicted director
Written by attorneys · grounded in primary & secondary sources — see below
A director who has a material financial interest in a transaction to which the corporation is a party or who is related to a person or entity that does. The presence of an interested director creates a conflicting-interest transaction that is voidable unless validated by approval of qualified directors after required disclosure, approval by qualified shares, or proof that the transaction was fair to the corporation.
Ines Ibarra, a director of Innovate Pharmaceuticals, holds convertible notes in a startup seeking to lease lab space from the company. Two other directors with no financial ties to the startup receive full disclosure of Ibarra's interest, deliberate alone, and vote to approve the lease. The transaction is effective because a majority of at least two qualified directors authorized it after required disclosure.
Sinclair Oil controls a subsidiary and causes it to declare dividends that drain cash needed for expansion. Minority shareholders challenge the dividends as self-dealing by the parent-dominated board. The court applies the intrinsic-fairness test because the controlling shareholder is an interested director whose conflict taints the dividend decision.
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The CEO of a target company negotiates a cash-out merger with a buyer in which he will receive substantial personal benefits. The board approves the deal after a brief presentation that omits key valuation data. Shareholders later sue, alleging the interested CEO's conflict rendered the process uninformed and the transaction unfair.
Directors of a bank holding company propose a reclassification that converts their preferred shares into common stock on favorable terms unavailable to public shareholders. Minority owners challenge the plan as self-dealing. The court requires entire-fairness review because the reclassification is a transaction in which the directors are interested.
A financial-services company merges with an affiliate after a fully informed vote of disinterested stockholders. A shareholder later attacks the deal, claiming the board was interested. The court holds that the uncoerced stockholder vote shifts review from entire fairness to business judgment because the conflict was cleansed by informed ratification.
The interested director must disclose all material facts about the conflict and the transaction that are not already known to the qualified directors. Disclosure must occur before the qualified directors deliberate and vote outside the presence of any non-qualified director.
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A majority of the qualified directors who actually vote, but never fewer than two, must approve after receiving required disclosure. The qualified directors must deliberate and vote without participation by any interested director.
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The transaction remains subject to entire-fairness review. The interested director bears the burden of proving the deal was fair to the corporation at the time it was authorized.
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Yes. A committee composed entirely of qualified directors may authorize the transaction if at least two qualified members deliberate and vote after receiving the required disclosure and outside the presence of any interested director.
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…A.2d 278 (1978). The settled rule in Delaware is that "where a majority of fully informed stockholders ratify action of even interested directors, an attack on the ratified transaction normally must fail." Gerlach v. Gillam , Del.Ch., 139 A.2d 591, 593 (1958). The question of whether shareholders have been fully informed such that…