Director conflicts of interest under the Florida Business Corporation Act: hidden shoals in a safe harbor.

• Author: Davis, Gardner
• Position: Florida

A literal reading suggest procedural compliance affords absolute insulation from judicial scrutiny, but case law indicates the court may reach the substantive fairness of the conflict transaction.

The Florida Business Corporation Act, F.S. [sections] 607.0832, provides a safe harbor procedure to insulate transactions from shareholder challenges based on a director's conflict of interest. However, the statute, as presently drafted, may create a false sense of predictability and finality for interested director transactions insofar as technical compliance with the procedural provisions for disinterested director approval may not foreclose judicial inquiry into the substantive fairness of the transaction.

A growing number of courts have interpreted the Model Business Corporation Act provision, which forms the basis for Florida's present director's conflict of interest statute, as requiring the transaction both to pass the safe harbor procedures and be substantively fair to the corporation in order to obtain full immunity from judicial scrutiny. In light of this trend, the following discussion will review Florida's current statute, consider two recent model legislation proposals, and conclude with a recommendation regarding the direction that the Florida Legislature should take in order to provide interested director transactions with adequate protection from judicial scrutiny.

The Development of Present Statute

At common law, interested director transactions were voidable, regardless of whether the transaction was fair or approved by a majority of disinterested shareholders or directors. A director's participation in any interested transaction was treated as a breach of the director's duty of loyalty to the corporation. As corporate management became more complicated, this approach became impractical, and in 1969, the American Bar Association's Committee on Corporate Laws introduced [sections] 41 the Model Business Corporation Act. Section 41, and its successor, [sections] 8.31, adopted in 1984, created safe harbor procedures by which conflict of interest transactions between corporations and their directors could be salvaged, while at the same time corporations and their shareholders could be protected against unfair dealing by self-aggrandizing directors.

The procedure basically requires that the interested director disclose the conflict to either the shareholders or the board of directors (depending on which group functions as the decisionmaker of the corporation), and that they approve the transaction by a majority vote after gaining knowledge of the conflict. If approved, the transaction will be encompassed by the safe harbor, and the presumptions of the business judgment rule will shield the transaction.

Provisions for Interested Director Transactions

Florida's statutory provision regarding directors' conflict of interest transactions is F.S. [sections] 607.0832. The language of [sections] 607.0832 closely resembles that of the 1984 model act provision 8.31, providing a safe harbor for interested director transactions if the director discloses the conflict and if the transaction is approved by a majority of disinterested directors or shareholders, or if the transaction is fair to the corporation at the time it is made. Notably, the Florida statute does not require that the director disclose the material facts of the conflicting interest; the director must only disclose the fact that the relationship or interest exists.

The disjunctive language of both the model act provision 8.31 and the Florida statute suggests that the burden of establishing fairness is lifted from the director once he or she discloses the conflict, and the transaction meets the approval of a majority of disinterested directors or shareholders. The disjunctive language also suggests that a transaction is valid even if the director...