Tuesday, April 17, 2007, 1:09 PM

COA Holds Children, Spouses Don't Constitute "Direct Interest" In Corporate Director Conflict-Of-Interest Analysis

In Geitner v. Mullins, filed today, the COA held, inter alia, that a corporate director's voting in favor of his spouse or children doesn't constitute a conflict of interest.

In Geitner, family members of the founder of Southern Hoisery Mills, Inc., a closely held corporation, were also members of the company's board of directors. Plaintiffs, members of the family and the board, brought a declaratory judgment action seeking to invalidate the other family members' board votes regarding compensation of those family members and their immediate family members, as well as the election of one of those family member as company president, due to conflicts of interest.

N.C. Gen. Stat. sec. 55-8-31, which underpinned the plaintiffs' action, states "A conflict of interest transaction is a transaction with the corporation in which a director of the corporation has a direct or indirect interest. . . ." Citing to nothing beyond 55-8-31 itself, which defines indirect interest but does not define direct interest, the COA majority held that "[t]he General Assembly clearly and unequivocally did not define a director as having a conflict of interest solely based upon a familial relationship . . . ."

The COA majority also held that 55-8-31 did not provide a basis for challenging the allegedly interested directors' votes because the statute addressed only transactions with the corporation, and not electing officers and setting compensation as in this case. The majority provided little guidance as to what a "transaction with the corporation" is, but made clear that neither electing officers nor setting compensation is one.

Judge Geer concurred in the result, but disagreed with the majority's reasoning. Judge Geer found the suggestion that a director is not interested in a transaction benefiting his spouse or child to be "illogical." Judge Geer noted that direct interest as used in 55-8-31 was not defined, and that treatises and the Model Business Act indicate that a director indeed has a direct interest where a member of his immediate family has a material interest in a transaction.

Judge Geer would nevertheless affirm dismissal of the plaintiffs' claims on the ground that 55-8-31 provides no basis for simply automatically invalidating interested directors' votes. Judge Geer pointed out that 55-8-31 does not address who may vote. Rather, 55-8-31 makes interested transactions not per se invalid but only voidable, under certain conditions not pled here.

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