The North Carolina Court of Appeals has erroneously held that directors do not face conflicts of interest when they elect a family member as an officer, approve compensation for officer-family members, and approve “matters related to” those family members. The court also erroneously focused on the directors’ voting (rather than on the underlying transaction) to determine that election of a family member as an officer and compensation paid to officer-family members are not transactions “with the corporation”. The court erroneously held that those transactions are not subject to the North Carolina conflict of interest safe harbor statute.
In Geitner v. Mullins, a corporation was owned equally by Ms. Geitner and Ms. Mullins, two daughters of the founder. The six person board was not equally divided between the sisters. The board consisted of Ms. Geitner and her husband, on the one hand and Ms. Mullins, her husband (Mr. Mullins), her daughter (Ms. Shehan), and her son on the other hand. The Mullins branch controlled the corporation.
The board approved bonuses for Mr. Mullins, who was the president, and, after his death, voted to appoint Ms. Shehan as president and to give her a substantial raise. Mr. Mullins abstained from voting on his bonuses and Ms. Shehan abstained from voting on her appointment as president and concomitant raise. Each vote was approved by the remaining three Mullins directors (a non-family member replaced Mr. Mullins on the board and voted with the Mullins family); the two Geitner family directors voted against each transaction. The Geitners brought suit seeking a declaration that the Mullins directors’ votes were invalid and that any future votes “on matters related to” Mr. Mullins and Ms. Shehan would be invalid because they were not in conformity with the North Carolina conflict of interest statute. That statute is substantially identical to pre-1990 MBCA § 8.31, which is in effect in about a dozen states. It is comparable to Delaware’s approach in DGCL § 144.
Judge Tyson held that the family relationships, vel non, are insufficient to trigger the conflict of interest statute because the statute does not explicitly state that family relationships are conflicts of interest. He also held that the statute is not triggered because voting is not a transaction with the corporation. Thus the court affirmed entry of summary judgment for defendants.
Judge Geer, in her concurrence, disagreed with both of Judge Tyson’s assertions, and she is exactly right. She looked to both the standard treatise on North Carolina corporate law and, more pertinently, to the MBCA Official Comments for guidance. Both sources make salient the intuitive notion that a transaction between a corporation and a director’s immediate family member is a conflict of interest for the director. She then moved to a more central point, which Judge Tyson did not address at all: the operative effect of the conflict of interest statute. The statute does not invalidate director votes; it provides a safe harbor for transactions that might otherwise be voidable. Because the statute does not invalidate director votes, plaintiff’s declaratory relief request failed. Judge Geer mercifully declined to deal with Judge Tyson’s second ground. Had she done so, she doubtless would have pointed out that voting is obviously not the statute’s concern. The statute speaks to transactions with the corporation such as, oh, I don’t know, contracting with officers and agreeing to compensate them.