Chapter 21 - § 21.5 • CORPORATE GOVERNANCE

• Jurisdiction: Colorado

§ 21.5 • CORPORATE GOVERNANCE

§ 21.5.1—Conflicts of Interest

C.R.S. § 7-108-501 governs transactions in which a director has a conflict of interest. Kim v. Grover C. Coors Trust, 179 P.3d 86, 91 (Colo. App. 2007). In doing so, the CBCA outlines three scenarios that constitute "conflicting interest transactions":

(I) A loan or other assistance by a corporation to a director of the corporation or to an entity in which a director of the corporation is a director or officer or has a financial interest;
(II) A guaranty by a corporation of an obligation of a director of the corporation or of an obligation of an entity in which a director of the corporation is a director or officer or has a financial interest; or
(III) A contract or transaction between a corporation and a director of the corporation or between the corporation and an entity in which a director of the corporation is a director or officer or has a financial interest.

C.R.S. § 7-108-501(1)(a).

Despite its general prohibition on conflicting interest transactions, the CBCA sets forth an express procedure that, if followed, prevents a transaction from being invalidated solely because it involves a conflict of interest. In particular, it states that a self-dealing transaction between a corporation and one of its directors or another entity with which one of its directors is affiliated will not be void, voidable, enjoined, set aside, or give rise to an award of damages solely due to the conflict if (1) the material facts as to the director's interest and the transaction are fully disclosed to the disinterested directors or the shareholders and such disinterested directors or the shareholders, as the case may be, in good faith authorize the transaction by majority vote amongst themselves; or (2) the transaction is fair to the corporation. C.R.S. § 7-108-501.

This safe harbor provision, however, only establishes a limited safe harbor to prevent the transaction from being attacked as invalid per se because it constituted a conflict of interest transaction. If attacked on grounds that the directors violated their fiduciary duties in approving it, Colorado law suggests that the directors are still required to prove full disclosure, good faith, and fairness to the corporation. In contrast, under Delaware law, which has a substantively similar statute,⁵ the case law suggests that availing oneself of the procedures set forth therein (e.g., full disclosure and approval by disinterested board members or stockholders) provides the directors with the presumption of the business judgment rule and imposes the burden on the plaintiff.⁶

§ 21.5.2—Special Committees

The primary function of a special committee is to protect stockholders in cases where management and directors may have materially different interests than the stockholders. Special committees are similarly bound by a duty of care and a duty of loyalty. Sale transactions often include potential conflicts of interest that warrant a special committee analysis.

Even where there are no apparent interested directors at the beginning of a transaction review process, companies may form special committees as a precautionary diligence exercise. The role and makeup of special committees depends on the specifics of each transaction. Typical functions, characteristics, and factors that influence the need for special committees may include:

• Influence of certain directors (one or two dominant interested directors may substantially influence the board's decisions);
• The presence of non-interested directors; it may suffice for the interested directors to recuse themselves from

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