Self-dealing directors/trustees and Interlocking Directors/Trustees Explained (Sections 31-32, RCC)

Summary

Attorney Chris Batan Lasko's video explores the legal implications of contracts involving self-dealing directors and interlocking directors in corporations. He explains that such contracts are generally voidable but can be valid under specific conditions outlined in the Revised Corporation Code, including fairness, reasonableness, and approval by independent directors or the board. The video clarifies the distinction between substantial and nominal interests of directors in intercorporate contracts and provides guidance on the validity of these contracts.

Takeaways

• 📜 The video discusses the effects of contracts involving self-dealing directors, trustees, or officers within a corporation.
• 🔍 A 'self-dealing director' is defined as any director, trustee, or officer who enters into a contract with the corporation, including their relatives or spouse.
• ⚖️ Generally, contracts with self-dealing directors are voidable at the option of the corporation, unless certain conditions are met as per Section 31 of the revised corporation code.
• 📝 Section 31 outlines specific conditions under which a contract with a self-dealing director can be considered valid, such as the director's presence not being necessary for a quorum or contract approval.
• 👥 The contract must be fair and reasonable, even if the director's vote was not necessary for its approval, and must be authorized by the board of directors if involving an officer.
• 🏢 For corporations with public interest, material contracts need approval by at least two-thirds of the board members, with a majority of independent directors voting in favor.
• 🔄 If any of the first three conditions of Section 31 are absent, the contract may still be ratified by the stockholders or members representing at least two-thirds of the outstanding capital stock.
• 🔄 The second part of Section 31 allows for a contract to be valid even if one of the first three conditions is not met, provided it is fair, reasonable, and ratified by the required stockholder or member vote.
• 🔗 Section 32 addresses contracts between corporations with interlocking directors, stating that such contracts are not invalidated solely on the basis of interlocking directorship, unless fraud is involved.
• 📊 If an interlocking director has a substantial interest in one corporation and a nominal interest in another, the contract may be subject to the same conditions as self-dealing director contracts under Section 31.
• 📈 A 'substantial interest' is defined as holdings exceeding 20% of the outstanding capital stock, which can affect the validity of inter-corporate contracts under certain conditions.

Q & A

What is the main focus of the video by Attorney Chris Batan Lasko?

The main focus of the video is to simplify the law, particularly discussing the effects of contracts between a corporation and its directors, trustees, officers, or their relatives, and the implications of contracts between two corporations with interlocking directors.

What is meant by 'self-dealing directors or trustees'?

Self-dealing directors or trustees refer to individuals who enter into a contract with a corporation they are associated with, even if the contract involves their spouse or relatives within the fourth degree of consanguinity or affinity.

What is the general rule regarding contracts entered into by self-dealing directors or trustees with a corporation?

As a general rule, such contracts are voidable at the option of the corporation.

What conditions must be present for a contract with a self-dealing director to be considered valid according to Section 31 of the Revised Corporation Code?

The conditions include: a) the presence of the self-dealing director in the board meeting was not necessary for a quorum, b) the vote of the self-dealing director was not necessary for the contract's approval, c) the contract is fair and reasonable, d) material contracts are approved by at least two-thirds of the board with a majority of independent directors, and e) for officers, the contract must be previously authorized by the board of directors.

What does Section 32 of the Revised Corporation Code state about contracts between corporations with interlocking directors?

Section 32 states that a contract between corporations with interlocking directors is not invalidated solely on that ground, provided there is no fraud and the contract is fair and reasonable. However, if the interlocking director has a substantial interest in one corporation and a nominal interest in the other, the contract may be subject to the provisions of Section 31.

What is considered a 'nominal interest' in the context of interlocking directors?

A 'nominal interest' is not explicitly defined in the script, but it is contrasted with a 'substantial interest,' which is defined as holdings exceeding 20% of the outstanding capital stock.

How can a voidable contract with a self-dealing director become valid if certain conditions are absent?

The contract can be ratified by the vote of stockholders representing at least two-thirds of the outstanding capital stock or of at least two-thirds of the members in a meeting called for the purpose, provided full disclosure of the adverse interest is made and the contract is fair and reasonable.

What is the relevance of determining whether a director's interest in a corporation is nominal or substantial?

The relevance is to determine whether the contract between two corporations with interlocking directors is voidable or valid. If the director has a nominal interest in one corporation and a substantial interest in another, the contract may be voidable according to Section 31.

What happens if an interlocking director has substantial interests in both corporations involved in a contract?

If the interlocking director has substantial interests in both corporations, the contract is considered valid, and the conditions required under Section 31 do not apply.

What is the role of independent directors in approving material contracts with self-dealing directors according to Section 31?

At least a majority of the independent directors must approve the material contract for it to be considered valid.

How does the video aim to help viewers understand complex legal concepts?

The video aims to simplify the law by discussing legal concepts and principles in an accessible manner, focusing on specific sections of the Revised Corporation Code and providing clear explanations of the conditions under which certain contracts are considered valid or voidable.