Self-dealing directors/trustees and Interlocking Directors/Trustees Explained (Sections 31-32, RCC)
Summary
TLDRAttorney 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.
Outlines
📚 Introduction to Self-Dealing Contracts in Corporations
Attorney Chris Batan Lasko introduces his YouTube channel, which aims to simplify the law in under 10 minutes per video. In this video, he discusses the implications of contracts involving a corporation and its directors, trustees, officers, or their relatives. He explains the term 'self-dealing directors' and outlines the general rule that such contracts are voidable, but can be valid under certain conditions as stipulated in Section 31 of the Revised Corporation Code.
🔍 Conditions for Validity of Self-Dealing Contracts
The video delves into the specific conditions under Section 31 that must be met for a self-dealing contract to be considered valid. These include the non-necessity of the self-dealing director's presence for a quorum, the irrelevance of their vote for contract approval, the contract's fairness and reasonableness, approval by two-thirds of the board for corporations with public interest, and prior authorization by the board for contracts with officers. The explanation includes examples to clarify each condition.
📜 Ratification of Self-Dealing Contracts Despite Absent Conditions
The second part of Section 31 is explored, which allows for the ratification of self-dealing contracts even if the first three conditions are not met. The contract can still be valid if ratified by at least two-thirds of the outstanding capital stock or members, provided full disclosure of the director's adverse interest and the contract's fairness and reasonableness are established.
🤝 Validity of Contracts with Interlocking Directors
The script moves on to discuss contracts between corporations with interlocking directors, as per Section 32 of the Revised Corporation Code. It clarifies that such contracts are generally valid unless fraud is involved and the contract is fair and reasonable. However, if an interlocking director has a nominal interest in one corporation and a substantial interest in another, the contract may be voidable, and the conditions of Section 31 would apply to the corporation with the nominal interest.
🏢 Conclusion on Self-Dealing and Interlocking Director Contracts
The final paragraph summarizes the rules for contracts involving self-dealing directors and interlocking directors. It emphasizes that contracts are valid unless specific conditions make them voidable, and provides examples of different scenarios to illustrate when these contracts are considered valid. The video concludes with a reminder of the importance of understanding these legal nuances and an invitation for viewers to engage with the channel for more educational content.
Mindmap
Keywords
💡Self-dealing Director
💡Voidable Contract
💡Quorum
💡Interlocking Director
💡Section 31
💡Fair and Reasonable
💡Material Contract
💡Ratification
💡Substantial Interest
💡Nominal Interest
Highlights
Introduction to simplifying the law in under 10 minutes.
Discussion on the effects of contracts between a corporation and its directors, trustees, or officers.
Definition of self-dealing directors, trustees, and officers in contracts.
General rule that contracts with self-dealing directors are voidable.
Conditions under Section 31 for a voidable contract to be considered valid.
Explanation of the necessity of director presence in board meetings for quorum.
Clarification on the necessity of the self-dealing director's vote for contract approval.
Requirement for contracts to be fair and reasonable under the circumstances.
Special conditions for corporations with public interest and material contracts.
Authorization by the board of directors required for officer contracts to be valid.
Ratification of contracts with absent conditions by stockholders or members' vote.
Contracts between corporations with interlocking directors under Section 32.
Validity of contracts with interlocking directors unless involving fraud.
Substantial and nominal interests of interlocking directors in contracting corporations.
Voidability of contracts when interlocking directors have substantial interests in one corporation.
Application of Section 31 conditions to voidable contracts with interlocking directors.
Conclusion on the validity of contracts with interlocking directors based on their interests.
Encouragement for viewers to subscribe and engage with the channel for new content.
Transcripts
foreign
[Music]
hi i am attorney chris batan lasko
this is my virtual classroom welcome to
my youtube channel
in this channel i shall aim to simplify
the law i will discuss concepts and
principles of law in under 10 minutes
hi again everyone welcome to mbl
classroom for this video i want us to
talk about
what would be the effect of having a
contract between a corporation
and
one of their directors or trustees or
officers
and also what would be the effect of a
contract between
two corporations with interlocking
directors
so let's begin
now let's talk about first contracts
entered into between a corporation and
one of the directors or trustees or
officers or even the spouse of any of
the director trustee or officer or a
relative within the fourth degree of
consanguinity or affinity of any dir of
any such director trustee or officer
now
what do we call such director trustee or
officer who is entering into a contract
with a corporation what do we call them
we actually call them the self-dealing
directors or trustees
we also call them self-dealing directors
or trustees even if the contract was not
entered into between the corporation and
them
we still call themselves dealing
directors or trustees even if the
contract was entered into between the
corporation or their spouse or between
the corporation or their relative or
relatives within the fourth degree of
consanguinity or affinity
now what is the status of the contract
entered into between a corporation and a
self-leading director or trustee or a
self-dealing officer
as a general rule that contract is
voidable
are there contracts entered into between
a corporation
and a self-leading director or trustee
or officer that would be considered as
valid
yes there are
however
section 31 of your revised corporation
code requires certain circumstances to
be present for that contract to be
considered as valid what are these
circumstances let's take a look at
section 31.
it states
a contract of the corporation with one
or more of its directors trustees
officers or their spouses and relatives
within the fourth civil degree of
consanguinity or affinity is voidable of
the option of such corporation
unless all of the following conditions
are present
a the presence of such director or
trustee in the board meeting in which
the contract was approved was not
necessary to constitute a quorum for
such meeting b
the vote of such director or trustee was
not necessary for the approval of the
contract
c the contract is fair and reasonable
under the circumstances
d in case of corporations visited with
public interest material contracts are
approved by at least two-thirds of the
entire membership of the board with at
least a majority of the independent
directors voting to approve the material
contract and
e in case of an officer the contract has
been previously authorized by the board
of directors that is the first part of
section 31. where you see that as a
general rule contracts entered into
between a corporation and any
self-dealing director trustee or officer
becomes voidable at the option of the
corporation it becomes valid if the
conditions enumerated therein are
present
let's talk about these conditions the
first condition
says
that the presence of that self-dealing
director or trustee
must not be necessary to constitute a
quorum in that meeting where the
contract was approved
what does this mean
let me give you an illustration for you
to understand
condition number one
so if there are ten directors
and you have director a who is the
self-dealing director
in the meeting where the contract was
approved for example
there were seven directors who were
present out of them
seven directors out of ten clearly
constitutes a quorum because that's one
half plus one
is the presence of e necessary to
constitute the quorum
so let's have the seven
if this is a and he was present in the
coral
if
a
will not be counted in the meeting will
there still be a quarrel
that's one two three four five and six
are they still in a quarrel the answer
is yes so the first condition then is
present because the presence of uh a
is not necessary to constitute a quorum
there having been seven out of ten who
were present such that out of the seven
if he was included in the seven even if
he was the president there there would
still be six and that would still
constitute aquaro that is what is meant
by the first condition second condition
says
that the vote of that self-dealing
director or trustee was not necessary
for the approval of the contract now
let's go back to our example earlier on
where there were seven directors who
were present and among them was your
a who was who is the self-dealing
director now
since they're in a quorum of course they
can conduct business and they can
actually vote on the approval of the
contract with a
now from the seven
if
four voted
to
approve the contract because what is
needed is again still just the majority
if four voted to approve and among the
four who voted is a so the four voted
is
is vote necessary
to
approve the contract in that example
the answer is yes why because if you
remove a
then that would only have been three
whole voting
and the three out of seven is clearly
not the majority
how about
if
from the seven who attended the meeting
five voted to approve the contract
and two
voted not to approve it
and among the five who voted
a voted also to approve it
if you remove a from the equation from
the five who voted would the contract
still be approved
if there were seven of them there
so you have only four who approved
the answer is yes because four out of
seven is still the majority
in other words the vote of a is not
needed to approve the contract so that
is condition number two condition number
three is that the contract must be fair
and reasonable under the circumstances
in other words had it been another
another person whom the corporation is
dealing with it would have been
more or less the same terms and
conditions it must be fair and
reasonable
what is condition number four condition
number four
requires
in corporations vested with public
interest that in case of material
contracts entered into with self-dealing
directors or trustees it must be
approved by at least two-thirds
of the entire membership of the board it
is not based on the forum or not based
on the members present during the
meeting in the approval of the contract
but rather it is based on the entire
membership in other words it must be
two-thirds of the entire membership of
the board additionally condition number
four under section 31
um requires that at least a majority of
the independent directors must have also
approved the contract
condition number five
specifically applies to
contracts entered into by the
corporation with their officers
in case of officers for it to be valid
there must be
authorization by the board of directors
to make that contract valid so that's
basically the first part of section 31.
now what is the second part of section
31 the second part of section 31
actually gives you
the requisites provided for by law to
still make the contract valid
even if one of the first three
conditions are absent from the five that
we have mentioned
so in other words your revised
corporation code will still allow the
contract to be considered as valid even
if any of the first three conditions are
absent
what does the second part of section 31
say it says where any of the first three
conditions set forth in the preceding
paragraph is absent in the case of a
contract with the director or trustee
such contract may be ratified by the
vote of the 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 that full disclosure of the
adverse interest of the directors or
trustees involved is made at such
meeting and the contract is fair and
reasonable under the circumstances so
what does that tell you when you
actually read the second part of section
31 it tells you first that the contract
must always be fair and reasonable under
the circumstances in other words your
section 31 while it says that if any of
the three
first three conditions are absent
where number one that the presence of
the self-dealing director is not
necessary to constitute the quorum the
second condition is that the approval of
the self or the vote rather of the
self-leading director is not necessary
for the approval of the contract and
third is that it must be fair and
reasonable under the circumstances
when you actually read
the second part of section 31 the third
condition must always be present because
your second part of section 31
actually makes that a requirement so
that brings us to the first two
conditions
in other words if any of the first two
conditions are absent as what we have
mentioned
your contract with the self-dealing
director can actually still be
considered as valid if it is ratified by
the stockholders or members
and such ratification requires a vote of
at least two-thirds of the outstanding
capital stock if a stock corporation or
at least two-thirds of the members
if a non-stock corporation
now how about contracts between two
corporations with interlocking directors
or trustees
what is the status of that contract
between these two corporations
the answer to that question can be found
in the next provision your section 32 of
the revised corporation code let's take
a look at section 32.
it provides
except in cases of fraud and provided
the contract is fair and reasonable
under the circumstances a contract
between two or more corporations having
interlocking directors shall not be
invalidated on that ground alone
provided that if the interest of the
interlocking director in one corporation
is substantial and the interest in the
other corporation or corporations is
merely nominal the contract shall be
subject to the provisions of the
preceding section in so far as the
latter corporation or corporations are
concerned
holdings exceeding 20
of the outstanding capital stock shall
be considered substantial for purposes
of interlocking directors so first what
is an interlocking director an
interlocking director is where between
two corporations having a contract with
each other that corporation that
director rather is a director in one
corporation and is also a director of
that other corporation so if abc
corporation is having a contract with
xyz corporation you have
one director who is also a director in
abc and also a director in xyz
corporation
now with that example
is the contract between abc and xyz
considered as valid
section 32 says so long as there is no
fraud involved and the contract is fair
and reasonable under the circumstances
the general rule is the contract between
abc and xyz is considered as valid even
if you have an interlocking director
that's the general rule what is the
exception
the exception is that
it becomes voidable if that director has
a nominal
interest in one corporation and a
substantial interest in the other
corporation
let me give you an example
you have abc corporation and then you
have xyz corporation
they enter into a contract with each
other
and then you have
mr v
mr b is a director in abc corporation
and is also a director in xyz
corporation
again as a general rule even if mr v is
an interlocking director in the two
corporations the general rule is the
contract between the two corporations is
considered as valid
it is considered as voidable
only when
mr v has a nominal nominal interest in
one corporation and a substantial
interest in another corporation now what
is considered as a nominal interest and
what is considered as a substantial
interest your section 32 also tells you
what is considered as a substantial
interest in a corporation
your section 32 says that you are
considered to have a substantial
interest in the corporation if your
interest exceeds 20
so let's go back to our example with mr
v so you have abc corporation where he
is a director and you have also xyz
corporation where he is also a director
if for example mr v's interest in ebc
corporation is 15
and his interest in xyz corporation is
25
what does that tell you that tells you
that he has a nominal interest in abc
while a substantial interest in xyz
what does section 32 tell you if that is
the case
it tells you that it now becomes
voidable at the option of the
corporation which corporation
it becomes voidable at the option of the
corporation where mr v has a nominal
interest and in our example your abc
corporation
so what is the relevance now of knowing
which corporation can treat it as
voidable
its relevance now is that we now follow
the rules of the preceding provision or
the rules under section 31 on
self-dealing directors
in other words
in abc corporation they will now have to
look at whether all the five conditions
are present
if all the five conditions are present
then the contract is
valid
if any of those conditions first
preconditions are absent then it may
still be considered as valid if it is
stratified by at least two-thirds of the
outstanding capital stock or at least
two-thirds of the members
now
supposing
mr v's
interest in abc corporation is 25
and his interest in xyz corporation is
50
now both his interests in the two
corporations
having a contract with each other are
both substantial
what happens now
the contract is considered as valid and
you do not apply the conditions required
under section 31 in any of the
corporations
another example
if
the interest of mr v in abc corporation
is fifteen percent fifteen one five
percent and you and his interest rather
in xyz corporation is 10
in this example the interest of mr v in
both corporations are nominal
do you apply section 31 on the five
conditions the answer is no
it's considered as valid why do we say
so because section 32 only
tells you that it becomes voidable where
you follow section 31 on the five
conditions
if the interest of the interlocking
director is nominal in one corporation
and is substantial in another if both
his interests are nominal in the two
corporations or both his interests in
the two corporations are substantial
then the contract entered into by the
two corporations would be considered as
valid
so that is section 31 and section 32 of
the revised corporation code i hope i
was able to simplify the concepts
of
self-leading directors and also on
interlocking directors i hope you have
learned again something new from this
video and i will see you in the next
so if you find this video helpful please
click like subscribe and that
notification bell so that you will be
notified of new video uploads thank you
for watching see you next time in mbl
classroom
[Music]
you
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