Action by directors at an illegal board meeting may be adopted and ratified at a later legal meeting of the board, but directors who were not notified of a board meeting cannot later, as individuals, waive the failure to give notice or concur in the action taken at the illegal meeting so as to bind the association. 25 It appears that a director may waive notice of a board meeting prior to the meeting, 26 but this cannot be done subsequently so as to validate the action taken. If a director has notice, and fails to attend the board meeting, his absence does not affect action taken, provided a qualified quorum was present. Quorum What constitutes a quorum of the board of directors? At common law, the general rule is that a majority of directors of a corporation who are not personally interested in the subject before the board, and who are otherwise qualified, is necessary to constitute a quorum of the board of directors for the transaction of business.27 There may, of course, be statutory, charter, or bylaw provisions changing this rule. Thus, if a majority of qualified directors or the number specified in the statute, the charter, or the bylaws, do not attend a duly called board meeting, any business transacted at the meeting is at least voidable. Directors cannot vote by proxy.28 A transaction may not be successfully attacked by one who is not a party to the transaction because a quorum of the board of directors was not present at the meeting of the board at which it was "authorized."29 If a qualified quorum is present at a properly convened board meeting, a majority thereof at common law may exercise 25 United States v. Interstate R. Cò., 14 F. 2d 328 (W.D. Va. 1926). 26 Holcombe v. Trenton White City Co., 80 N.J. Eq. 122, 82 A. 618 (1912); United States v. Interstate R. Co., 14 F. 2d 328 (W.D. Va. 1926). 27 In re Webster Loose Leaf Filing Co., 240 F. 779 (D. N.J. 1916); Stanton v. Occidental Life Ins. Co., 81 Mont. 44, 261 P. 620 (1927); Cardin Bldg. Co. v. Smith, 125 Okla. 300, 258 P. 910 (1927). See also Rust, “Mr. Chairman—,” FCS Information 6, Farmer Cooperative Service, U.S. Dept. Agr. (1957). 28 Haldeman v. Haldeman, 176 Ky. 635, 197 S.W. 376 (1917); In re Acadia Dairies, Inc., 15 Del. Ch. 248, 135 A. 846 (1927). 29 Robertson v. Hartman, 6 Cal. 2d 408, 57 P. 2d 1310 (1936). any powers vested in the board of directors. 30 There ceases to be a quorum when a director who is necessary for a quorum withdraws from a meeting. In one case, the failure of a director to vote upon a proposition before the board, where his vote was necessary to constitute a quorum, was held to result in no quorum with respect to that matter. 31 On the other hand, in some States a director present but not voting is counted for the negative.32 If a statute or bylaw requires, say, a two-thirds vote of the members present, the failure of members present to vote renders the action taken a nullity if twothirds of those present do not vote for the proposition.33 The foregoing is based upon the theory that each director who attends the meeting is qualified to act because "All of the directors constituting a quorum must be qualified to act. If one of the directors whose presence is necessary to constitute a quorum, or whose vote is necessary to constitute a majority of a quorum, is disqualified by reason of his personal interest, any act done by the body is invalid,"34 or at least voidable. Some courts apparently hold that a director who is personally interested in a proposition may be counted in determining if a quorum was present at the time the proposition was voted upon, leaving its validity, after subjecting it to severe scrutiny, to depend upon its fairness toward, and effect upon, the corporation, with the burden of showing its fairness on the director.35 Conflicting Personal Interests At common law, any transaction entered into by a director or officer of an association with anyone, which might conflict with his duty to the association, is voidable. For instance, an 30 In re Webster Loose Leaf Filing Co., 240 F. 779 (D. N.J. 1916). 31 North Louisiana Baptist Association v. Milliken, 110 La. 1002, 35 So. 264 (1903). 32 Commonwealth v. Wickersham, 66 Pa. 134 (1870). 33 James R. Kirby Post No. 50 v. American Legion, 258 Mass. 434, 155 N.E. 462 (1927); Stephany v. Liberty Cut Glass Works, 76 N.J. Law 449, 69 A. 967 (1908). 34 In re Webster Loose Leaf Filing Co., 240 F. 779 (D.C.N.J. 1916); Smith v. Los Angeles I. & L. Co-op Association, 78 Cal. 289, 20 P. 677, 12 Am. St. Rep. 53 (1889); Holcomb v. Forsyth, 216 Ala. 486, 113 So. 516 (1927); Stanton v. Occidental Life Ins. Co., 81 Mont. 44, 261 P. 620 (1927). 35 Nicholson v. Kingery, 37 Wyo. 299, 261 P. 122 (1927). agreement by a director or officer of a cooperative to keep another person in the employ of the association will not be enforced because the members are entitled to have the judgment of the director or officer "exercised with a sole regard to the interests of the company."36 Again, directors cannot engage in a rival business to the detriment of the corporation. 37 Directors and officers of any corporation, cooperative, or otherwise, may be compelled to account to their corporation for any gifts, gratuities, or bonuses received by them from persons with whom the association is or may be having business relations.38 The object of this rule, like the others akin to it, is to enable corporations to have the “judicial judgment" of their directors and officers free from any suggestion of bias other than the welfare of the corporation. In addition, there are rules relating to conflict of interest which some writers put under the heading "holding interest adverse to that of corporation."39 The phrase "conflict of interest" is very old in the law. As early as 1846, the Supreme Court of the United States said this about it: The general rule stands upon our great moral Directors have wide latitude in the management of a corporation's affairs but any conduct on their part that indicates an interest adverse to that of their corporation will ordinarily be 36 West v. Camden, 135 U.S. 507, 521 (1890). 37 Coleman v. Hanger, 210 Ky. 309, 275 S. W. 784 (1925). 38 Keely v. Black, 90 N.J. Eq. 439, 107 A. 825 (1919); Keystone Guard v. Beaman, 264 Pa. 397, 107 A. 835 (1919); Holland Furniture Co. v. Knooihuizen, 197 Mich. 241, 163 N. W. 884 (1917). 39See Knepper, Liability of Corporate Officers and Directors, 2d ed., The Allen Smith Co., Indianapolis, Ind. (1972), p.29. 40 Michoud v. Girod, 45 U.S. 503, 554 (1846). subjected to the utmost scrutiny. In the absence of any such evidence, however, directors will not be presumed unfaithful to their trust.41 Self-dealing, on the other hand, is strictly condemned. Where any such dealing appears, the burden is upon the interested director to establish his good faith and the fairness of the transaction to the corporation.42 The courts have adopted a number of different rules over the years to deal with the problem of conflict of interest in business transactions between a corporation and its directors or officers. In discussing the history of these rules, Professor Harold Marsh, Jr., points out that some of the earlier principles applied in these situations "have been largely if not completely abandoned.”43 As to earlier rules, he says: "In 1890 it could have been stated with confidence that in the United States the general rule was that any contract between a director and his corporation was voidable at the instance of the corporation or its shareholders, without regard to the fairness or unfairness of the transaction. This rule was stated in powerful terms by a number of highly regarded courts and judges in cases which arose generally out of the railroad frauds of the 1860's and 1870's."44 For example, in Wardell v. Union Pacific R. R. Co., Mr. Justice Field said: It is among the rudiments of the law that the same person cannot act for himself and at the same time, with respect to the same matter, as the agent of another whose interests are conflicting. ***The law, therefore, will always condemn the transactions of a party on his own behalf when, in respect to the matter concerned, he is the agent of others, and will relieve against them whenever their enforcement is seasonably resisted. Directors of corporations, and all persons who 41 Atwater v. Wheeling & Lake Erie Ry. Co., 56 F. 2d 720, 723 (6th Cir. 1932). 42 Pepper v. Litton, 308 U.S. 295 (1939), citing Geddes v. Anaconda Copper Mining Co., 254 U.S. 590, 599 (1921); Twin-Lick Oil Co. v. Marbury, 91 U.S. 587 (1875). 43 Marsh, Are Directors Trustees? Conflict of Interest and Corporate Morality, 22 Bus. Law. 35 (1966). 44Cases cited include Mallory v. Mallory-Wheeler Co., 61 Conn. 131, 23 A. 708 (1891); Davis v. The Rock Creek L. R. & M. Co., 55 Cal. 359 (1880); Wardell V. Union Pacific R. R. Co., 103 U.S. 651 (1880); Hoffman Steam Coal Co. v. Cumberland Coal and Iron Co., 16 Md. 456 (1860). stand in a fiduciary relation to other parties, and are By 1910, according to Professor Marsh, "the general rule was that a contract between a director and his corporation was valid if it was approved by a disinterested majority of his fellow directors and was not found to be unfair or fraudulent by the court if challenged; but that a contract in which a majority of the board was interested was voidable at the instance of the corporation or its shareholders without regard to any question of fairness." "By 1960," Professor Marsh concluded, "it could be said with some assurance that the general rule was that no transaction of a corporation with any or all of its directors was automatically voidable at the suit of a shareholder, whether there was a disinterested majority of the board or not; but that the courts would review such a contract and subject it to rigid and careful scrutiny, and would invalidate the contract if it was found to be unfair to the corporation." This statement is generally referred to as the modern rule and under it the courts have shown a tendency to uphold conflict of interest contracts that have been approved or ratified by a majority of the stockholders, unless the transactions are shown to be fraudulent.46 There are three rules generally recognized as applying in cases where a corporation's contract with one of its directors was authorized at a board meeting in which the presence of the interested director was necessary for a quorum and his vote was needed for a majority. These rules are: 1. The contract is voidable at the option of the corporation on the basis of the conflicting interest alone. This is referred to as the majority rule.47 45103 U.S. 651 (1880). 46 Knepper, Liability of Corporate Officers and Directors, 2d ed., The Allen Smith Co., Indianapolis, Ind. (1972), p. 31. 47 See 19 Am. Jur. 2d, Corporations, § 1293 and 3 Fletcher, Cyc. Corp. (Perm. Ed.) § 924 and cases cited. |